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THE  A  B  C   OF   STOCK  SPECULATION. 


Nelson's 

Wall   Street  Libraey. 

Volume  V. 


The  A  B  C  of  Stock 
Speculation 


BY 

S.    A.    NELSON 


^ 


S.     A.     NELSON 

i6  Park  Place  New  York 


Copyright,  1902. 


PREFACE 


Following  the  publication  of  The  A  B  C  of  Wall  Street 
there  were  many  requests  for  a  book  dealing  with  the  prin- 
ciples governing  stock  speculation.  If  there  is  one  man 
better  qualified  than  another  to  produce  such  a  book  that 
man  is  Mr.  Charles  H.  Dow.  Several  attempts  were  made 
to  have  him  write  the  desired  volume  but  they  were  unavail- 
ing. From  time  to  time  in  his  Wall  Street  career,  extend- 
ing over  a  quarter  of  a  century,  Mr.  Dow  has  carefully 
evolved  his  theories  of  successful  stock  speculation.  They 
are  to  be  found  in  Chapters  IV  to  XX,  inclusive,  and  can 
be  commended  to  any  one  interested  in  stock  speculation  as 
remarkable  for  their  grasp  of  a  subject  about  which  so  little 
has  been  written  and  so  much  misinformation  is  gratui- 
tiously  offered  the  public.  In  the  preparation  of  this  little 
volume  thanks  are  also  due  to  the  Wall  Street  Journal, 
the  Evening  Post,  the  Dow,  Jones  &  Co.'s  News  Agency, 
Mr.  Alexander  Dana  Noyes,  Mr.  Daniel  Kellogg,  Mr.  E. 
W.  Harden,  and  a  number  of  brokers  and  speculators. 
The  reader  of  course  understands  that  there  is  no  royal 
road  to  success  in  speculation.  It  would  be  fallacy  to 
undertake  to  show  how  money  can  be  made.  No  infallible 
plan  has  yet  been  discovered.  Experience  and  observation 
when  intelligent,  however,  are  valuable,  and  we  are  of  the 
opinion  that  the  average  speculator  will  find  a  study  of 
the  following  pages  to  be  useful  and  profitable. 


CONTENTS 


THE  A  B  C  OF  STOCK  SPECULATION 

Chapter  I.  page 

Origin  of  Stock  Brokers,  Stock  Exclianges  and  Stock  Speculation    11 

Chapter  II. 
Stock  Speculation  .... 


Chapter  III. 
Stock  Speculation  and  Gambling 

Chapter  IV. 
The  Morality  of  Wall  Street 

Chapter  V. 
Scientific  Speculation 

Chapter  VI. 
The  Two  General  Methods  of  Trading 

Chapter  VII. 
Three  General  Lines  of  Beasoning 

Chapter  vm. 
Swings  Within  Swings 

Chapter  IX. 
Methods  of  Beading  the  Market 

Chapter  X. 
The  Operation  of  Stop  Orders    . 

Chapter  XI. 

Cutting  Losses  Short 


1^ 

21 

25 

28 

31 

86 

39 

42 

46 

50 


chapteb  xn. 

The  Danger  in  Overtrading 

Chapteb  XJH. 


Methods  of  Trading 


The  Out  of  Town  Trader 


Chapter  XIV. 


Chapter  XV. 

The  Short  Side  of  the  Market    . 

Chapter  XVI. 

Speculation  for  the  Decline 

Chapter  XVII. 
Concerning  Discretionary  Accounts    . 


Chapter  XVm. 


The  Liability  for  Loss 


The  Recurrence  of  Crises 


Chapter  XIX. 


Chapter  XX. 


Financial  Criticism  .... 

Chapter  XXI. 
The  Physical  Position  of  the  Stock  Speculator 

Chapter  XXn. 
Temperament  and  Equipment  . 

Chapter  XXnL 
The  Broker  and  his  Client 

Chapter  XXIV. 
The  Bucket  Shop    ..... 

Chapter  XXV. 
The  Speculator  and  the  Consolidated  Exchange 

Chapter  XXVI. 
The  Tipster 


Ohapteb  xxvrr. 

Conclusions  of  a  Speculator 

chapteb  xxvm. 

Successful  and  Unsuccessful  Speculators 


An  Interestingr  Inquiry 


Chapter  XXIX. 


Chapteb  XXX. 
Stock  Market  Manipulation 


The  Kecord  of  Five  Panics 


Chapter  XXXI. 


End  of  Several  "  Booms ' 


Chapter  XXXn. 


Chapter  XXXin. 
Dealing  in  Unissued  Stocks 

Chapter  XXXIV. 
The  Tipster's  Point  of  View 


Wall  Street  Points  of  View 


Chapter  XXXV. 


page 
148 


168 
168 
174 
185 
190 
194 
199 
206 


THE  A  B  C  OF  STOCK  SPECULATION 


CHAPTEE  I.  I 

Origin  or  Stock  Brokees,  Stock  Exchanges  and  Stock 
Speculation. 

Etymological  authorities  are  not  in  entire  accord  re- 
specting the  origin  of  the  word  "Broker."  Jacob's  Law 
Dictionary  says:  "The  etymology  of  the  term  Broker  has 
been  variously  given.  By  some  it  has  been  derived  from  the 
Saxon  brocj  misfortune,  as  denoting  a  broken  trader;  the 
occupation  being  formerly  confined,  it  is  said,  to  unfortu- 
nate persons  of  that  description  (Tomlins).  According  to 
others  it  was  formed  from  the  French  hroieur,  a  grinder 
or  breaker  into  small  pieces;  a  Broker  being  one  who  heats 
or  draws  a  bargain  into  particulars  (Termes  de  la  Ley, 
Cowell).  The  law  Latin  from  ohrocator,  however,  seems 
to  point  distinctly  to  the  Saxon  ahroecan  (to  break),  as 
the  true  root,  which  in  the  old  word  abbrochment  (q.  v.) 
or  abroachment,  had  the  sense  of  breaking  up  goods  or 
selling  at  retail.  A  Broker,  therefore,  would  seem  to  have 
been  originally  a  retailer,  and  hence  we  find  the  old  word 
auctionarius  (q.  v.)  used  in  both  these  senses  (Barrill's 
Law  Diet.,  tit.  "Broker").  Wharton  gives,  as  the  deriva- 
tion of  the  word  the  French  broceur,  and  the  Latin  tritor, 
a  person  who  breaks  into  small  pieces  (Whar,  Law  Diet., 

n 


12  THE    ABC    OF     STOCK     SPECULATION. 

tit.  "Broker").  Webster  gives  as  its  derivation,  the  old 
English  hrocour,  Norman  French  hroggour,  French  hrocan- 
teur.  Under  the  word  "broke/'  to  deal  in  second  hand 
goods,  to  be  a  Broker,  Webster  says  it  is  probably  derived 
from  the  word  Irock.  Worcester  derives  it  from  the  An- 
glo-Saxon hrucan,  to  discharge  an  office;  hrocian,  to  op- 
press; and  the  French  hroyer,  to  grind.  See  "Broke"  and 
"Broker."  The  word  "Broker"  seems  first  to  occur  in  lit- 
erature in  Pier's  Ploughman,  "Among  burgeises  have  I  be 
Dwellyng  at  London.  And  gart  Backbiting  be  a  brocour. 
To  blame  men's  ware."  It  clearly  means  here  a  fault  find- 
er, as  in  Provencal  hrac  is  refuse.  The  Broker  was  original- 
ly one  who  inspected  goods  and  rejected  what  was  below 
the  standard  (Wedgwood).  Crabb's  Dig.  of  Stat.,  tit.  "Bro- 
kers," 261,  says,  "There  were  a  class  of  persons  known  to 
the  Eomans  who  were  deemed  public  officers,  and  who 
united  the  functions  of  bankers,  exchangers,  Brokers,  com- 
missioners and  notaries  all  in  one  under  the  description 
of  proxe  netae" 

As  early  as  1285,  in  England,  the  term  Broker  occurs 
in  an  Act  of  Parliament.  It  enacts  that  "there  shall  be  no 
Broker  in  the  city  (London),  except  those  who  are  ad- 
mitted and  sworn  before  the  warden,  mayor  or  aldermen." 

John  R.  Dos  Passos,  an  authority  on  stock  exchange 
law,  says :  "The  next  statute  passed  in  the  reign  of  James 
the  First,  more  than  300  years  later  (1634)  regulates  the 
calling  of  Brokers  with  greater  detail  than  the  first  act 
and  clearly  shows,  by  the  use  of  the  words  'merchandise 
and  wares'  that  down  to  this  period  the  Broker  in  money, 
stock,  and  funds  had  no  legal  existence.  .     .     It  was 


THE     ABC     OF     STOCK     SPECULATION.  13 

not  until  the  latter  part  of  the  seventeenth  century,  when 
the  East  India  Company  came  prominently  before  the 
public,  that  trading  or  speculating  in  stock  became  an 
established  business  in  England;  and  the  term  'Broker,' 
which  had  then  a  well-understood  meaning  was  promptly 
transferred  to  those  persons  who  were  employed  to  buy  or 
sell  stocks  or  shares,  and  who  thenceforth  became  known 
as  'stock-brokers.' " 

In  1697  owing  to  the  "unjust  practices  and  designs"  of 
Brokers  and  Stock-jobbers  in  selling  tallies,  bank  stock, 
bank  bills,  shares  and  interest  in  joint  stock,  a  stringent 
act  was  passed  permitting  only  sworn  appointees  to  act  as 
Brokers.  In  the  reigns  of  William  III.,  Anne  and  George, 
statutes  were  passed  regulating  the  practice  and  trade  of 
Brokers. 

An  early  legal  writer  describing  Stockbrokers,  said: 
"Stockbrokers  are  persons  who  confine  their  transactions 
to  the  buying  and  selling  of  property  in  the  public  funds 
and  other  securities  for  money,  and  they  are  employed  by 
the  proprietors  or  holders  of  the  said  securities.  Of  late 
years,  owing  to  the  prodigious  increase  of  the  funded  debt 
of  the  nation,  commonly  called  the  stock,  they  are  become 
a  very  numerous  and  considerable  body,  and  have  built 
by  subscription,  a  room  near  the  Bank,  wherein  they  meet 
to  transact  business  with  their  principals,  and  with  each 
other;  and  to  prepare  and  settle  their  proceedings  before 
they  go  to  the  transfer-offices  at  the  Bank,  the  South  Sea 
and  India  houses,  thereby  preventing  a  great  deal  of  con- 
fusion at  the  public  offices,  where  the  concourse  of  people 
is  so  great  during  the  hours  of  transferring  stock  that  if 


14  THE     ABC     OF     STOCK     SPECULATION". 

the  business  was  not  prepared  beforehand  it  would  be 
impossible  to  transact  it  within  the  given  time." 

The  advantage  of  having  a  Broker  as  an  intermediary 
was  recognized  by  merchants  many  centuries  ago.  A  six- 
teenth century  writer  on  the  law  says:  "It  is  an  old  prov- 
erb;,  and  very  true,  that  between  what  you  will  buy?  and 
what  you  will  sell  ?  there  is  twenty  in  the  hundred  differing 
in  the  price,  which  is  the  cause  that  all  the  nations  do  more 
effect  to  sell  their  commodities  with  reputation  by  means 
of  Brokers  than  we  do;  for  that  which  seems  to  be  gotten 
thereby  is  more  than  double  lost  another  way.  Besides, 
that  by  that  course  many  differences  are  prevented  which 
arise  between  man  and  man  in  their  bargains  or  verbal 
contracts;  for  the  testimony  of  a  sworn  Broker  and  his 
book  together  is  sufficient  to  end  the  same." 

Dealings  in  Stock  certificates  constitute  the  main  busi- 
ness of  Stock-brokers,  but  the  origin  of  stock  certificates 
has  not  been  satisfactorily  traced  beyond  the  middle  of  the 
seventeenth  century.  Property  in  this  form  was  not  known 
to  the  ancient  law.  While  mercantile  or  commercial  cor- 
porations existed  among  the  Eomans,  history  gives  us  no 
information  regarding  their  character  or  methods  of  con- 
duct. 

Ang.  &  Ames  on  Corporations  (10th  ed.)  Ch.  18,  Sec. 
26,  says:  "A  Collegium  Mercatorum  existed  at  Rome  493 
B.  C,  but  the  modern  bourse  from  the  Latin  bursa,  a 
purse,  originated  about  the  fifteenth  century.  Bourges  and 
Amsterdam  contend  for  the  honor  of  having  erected  the 
first  bourse." 

"The  Roman  law,"  says  John  E,  Dos  Passos,  "required 


THE     ABC     OF     STOCK     SPECULATION.  15 

three  persons  to  organize  a  corporation;  and  as  each  body 
had  at  least  that  number  of  members,  if  not  more,  it 
would  seem  but  natural  that  a  certificate,  or  some  other 
substantial  muniment  of  title,  should  have  been  issued  by 
the  corporation  to  its  respective  members,  in  which  the 
proportion  of  interest  of  each  in  the  capital  or  corporate 
property  of  the  association  appeared.  But  whether  a  cer- 
tificate was,  in  fact,  issued,  and,  if  so,  was  regarded  as 
property  capable  of  sale  or  other  negotiation,  and  of  vest- 
ing in  the  representatives  of  the  owner,  on  his  decease,  or 
whether  the  corporations  were  all  of  the  nature  of  guilds 
conferring  upon  the  members  mere  personal  rights — all 
of  these  questions  seem  now  to  be  incapable  of  solution; 
and  the  Eoman  law,  which  sheds  such  floods  of  light  upon 
commercial  subjects  apparently  leaves  the  above  matters  in 
total  darkness." 

In  England,  in  1770,  Lord  Mansfield  in  a  case  wherein 
it  was  contended  that  stock  certificates  were  money  de- 
cided against  that  view,  saying:  "This  is  a  new  species  of 
property  arisen  within  the  compass  of  a  few  years.  It  is 
not  money." 

The  Stock  Exchange  or  Bourse  in  its  present  use  is  a 
modern  creation.  Brokers  and  dealers  in  stocks  and  mer- 
chandise dealt  together  in  an  exchange  in  Cornhill,  Lon- 
don, in  1670,  or  thereabouts.  In  1698,  the  Stock-brokers 
of  London  obtained  quarters  for  their  exclusive  use. 

The  first  Stock  Exchange  formed  in  the  United  States 
was  that  of  Philadelphia,  where  a  Board  of  Stock-brokers 
formally  organized  and  adopted  a  constitution  in  the  early 
part  of  the  eighteenth  century. 


16  THE     ABC     OF     STOCK    SPECULATION. 

The  New  York  Stock  Exchange,  framed  on  the  plan  of 
the  one  in  Philadelphia,  was  organized  in  1817,  but  curi- 
ously enough  this  institution  is  in  possession  of  a  docu- 
ment bearing  date  May  17,  1792,  signed  by  a  number  of 
Brokers,  in  which  it  is  stated:  "We,  the  subscribers.  Bro- 
kers for  the  purchase  and  sale  of  public  business,  agree  to 
do  business  at  not  less  than  one-fourth  of  one  per  cent." 

Medberry,  in  his  "Men  and  Mysteries  of  Wall  Street," 
describes  early  stock  speculation  in  this  country  as  fol- 
lows: .  .  .  "When  Washington  was  President,  and 
Continental  money  was  worth  a  trifle  more  as  currency 
than  as  waste  paper,  some  twenty  New  York  dealers  in 
public  stock  met  together  in  a  Broker's  office  and  signed 
their  names  in  the  bold,  strong  hand  of  their  generation, 
to  an  agreement  of  the  nature  of  a  protective  league.  The 
date  of  this  paper  is  May  17,  1792.  The  volume  of  busi- 
ness of  all  these  primitive  New  York  Brokers  could  not 
have  been  much  above  that  of  even  the  poorest  first-class 
Wall  Street  house  in  our  time  (1870).  The  Revolution- 
ary shinplasters,  as  the  irreverent  already  styled  them, 
were  spread  over  the  land  in  such  plenty  that  there  were 
$100  to  each  inhabitant.  Something  was  to  be  made,  there- 
fore, from  the  fluctuations  to  which  they  were  liable.  In- 
deed, one  of  the  greatest  Broker  firms  of  subsequent  years 
derived  its  capital  from  the  lucky  speculations  of  its 
senior  member  in  this  currency. 

"The  war  of  1812  gave  the  first  genuine  impulse  to  stock 
speculation.  The  Government  issued  sixteen  millions  in 
Treasury  notes,  and  put  loans  amounting  to  one  hundred 
and   nine   millions   on  the   market.     There   were   endless 


THE     ABC     OF     STOCK     SPECULATION.  17 

fluctuations  and  the  lazy-going  capitalists  of  the  time 
managed  to  gain  or  lose  handsome  fortunes.  Bank  stock 
was  also  a  favorite  investment.  An  illustration  of  one  of 
the  sources  of  money-making  to  Brokers  at  this  period  is 
found  in  the  fact  that  United  States  6s  of  1814  were  at  50 
in  specie  and  70  in  New  York  bank  currency. 

"In  1816  one  could  count  up  two  hundred  banks  with 
a  capital  of  $82,000,000.  .  .  .  One  day  in  1817,  the 
New  York  stock  dealers  met  in  the  room  of  an  associate 
and  voted  to  send  a  'delegate'  over  on  the  stage  line  to  in- 
vestigate the  system  adopted  in  the  rival  city  (Philadel- 
phia). The  Philadelphia  visit  was  successful;  and  the 
draft  of  a  constitution  and  by-laws,  framed  from  that  of 
the  Philadelphia  Board,  received  the  final  approbation  of 
a  sufficient  number  of  Brokers  to  enable  the  New  York 
Stock  Exchange  to  become  a  definite  fact.  Three  years 
after,  on  the  21st  of  February,  1820,  this  preliminary  code 
of  rules  received  a  thorough  revision  and  the  organization 
was  strengthened  by  the  accession  of  some  of  the  heaviest 
capitalists  in  the  city.  Indeed,  with  1820,  the  real  history 
of  the  Exchange  may  properly  be  said  to  commence." 

In  Europe  stock  speculation  historically  was  marked 
with  white  stones  1)y  the  "Tulip  Craze,"  the  South  Sea 
Bubble,  the  John  Law  inflation  in  France,  and  later  by 
the  wild  pj)eeulation  in  Kaffirs. 

In  this  country  for  more  than  half  a  century  stock  spec- 
ulation had  its  basis  in  the  securities  of  the  steam  railroad. 
It  has  ebbed  and  flowed  with  the  promotion,  construc- 
tion, decline,  and  reorganization  of  that  industry. 

In  the  last  decade  speculation  has  been  fostered  by  the 


18  THE     ABC     OF     STOCK   SPECULATION. 

"industrial  proposition,"  which  has  resulted  in  offering  to 
the  public  shares  of  industrial  corporations.  Not  an  in- 
dustry has  been  passed  by.  Like  the  railroad  the  industrial 
corporation  is  destined  to  have  its  periods  of  promotion, 
construction,  decline  and  reorganization.  It  will  not  be 
difficult  for  the  reader  to  determine  which  period  he  has 
under  immediate  consideration. 


THE     ABC     OF     STOCK     SPECULATION".  19 


CHAPTER   II. 

Stock  Speculation. 

For  many  years  stock  speculation  has  been  of  national 
and  absorbing  importance.  During  the  period  from  1896 
to  1902  investment  and  speculation  in  corporate  securities 
attained  an  unprecedented  importance,  owing  to  the  gen- 
eral movement  to  combine  and  incorporate  industrial  com- 
panies with  a  consequent  change  of  ownership.  Ownership 
which  had  been  vested  in  small  groups  of  individuals  now 
became  widely  distributed.  Where  an  industry  had  been 
controlled  and  owned  by  10  persons  the  number  multiplied 
and  increased  by  10  and  1,000-fold  through  the  medium  of 
share  ownership.  The  mine  and  the  factory  owned  by  the 
individual  were  merged  into  a  joint  corporation,  the  shares 
of  which  were  listed  on  the  Stock  Exchange,  and  offered 
to  the  public  for  investment  or  speculation.  The  United 
States  Steel  Corporation  has  more  than  40,000  stock- 
holders; the  American  Sugar  Refining,  11,000;  while 
other  corporations,  notably  those  representing  the  railroad, 
are  relatively  as  widely  distributed.  Stock  speculation  in 
the  United  States  in  the  period  named  was  also  inspired 
by  the  rehabilitation  of  the  railroad  industry,  the  stocks 
of  which  have  always  been  favorite  speculative  fuel,  and 
the  basis  for  the  intense  public  interest  and  activity  was 
the  general  prosperity  and  wealth  of  the  country.   A  vari- 


20  THE     ABC     OF     STOCK     SPECULATION. 

ety  of  causes  contributed  to  the  tremendous  increase  in 
national  wealth.  To-day,  speculation  in  the  shares  listed 
on  the  New  York  Stock  Exchange  is  not  only  confined  to 
New  York  but  extends  to  California  on  the  West,  Canada 
on  the  North,  Texas  on  the  South  and  London,  Paris  and 
Berlin  on  the  East.  The  telegraph,  telephone  and  cable 
wire  transmits  quotations  to  facilitate  speculation  to-day 
with  a  speed  and  perfection  of  method  that  would  have 
been  regarded  as  marvelous  by  the  founders  of  the  New 
York  Stock  Exchange,  and  quite  impossible  by  the  great 
manipulators  who  dominated  the  arena  a  quarter  of  a  cen- 
tury ago.  Millions  of  dollars  are  consumed  annually  in 
order  to  keep  the  machinery  of  Wall  Street  in  working 
order.  It  is  estimated  that  the  annual  expenses  of  300 
leading  Wall  Street  stock  firms  approximate  $15,000,000. 
In  view  of  the  commercial  and  economic  tendencies  of  the 
times,  the  indications  are  that  stock  speculation  will  con- 
tinue to  play  a  highly  important  part  in  the  country's 
trade.  In  1931  there  were  days  when  dealings  on  the 
Stock  Exchange  exceeded  3,000,000  shares  and  the  machin- 
ery of  speculation  threatened  to  break  down  under  the 
intensity  of  the  strain  to  which  it  was  subjected.  Whether 
the  records  of  that  year  will  ever  be  broken  no  man  can 
foretell,  but  it  is  reasonable  to  say  that  not  for  a  long  time 
will  interest  in  the  daily  changes  of  the  stock  market  be 
confined  solely  to  the  ranks  of  the  professional  stock  specu- 
lator who  conducts  his  operations  within  stone's  throw  of 
the  Stock  Exchange,  for  there  has  arisen  a  vast  army  of 
investors  and  speculators  who  are  deeply  interested  in  the 
day's  price  fluctuations. 


THE    ABC     OF     STOCK    SPECULATION.  31 


CHAPTEE  III. 
Stock  Speculation  and  Gambling. 

Is  there  any  difference  between  speculation  and  gam- 
bling? The  terms  are  often  used  interchangeably,  but 
speculation  pre-supposes  intellectual  effort;  gambling 
blind  chance.  Accurately  to  define  the  two  is  difficult;  all 
definitions  are  difficult.  "Wit  and  humor,  for  instance,  can 
be  defined;  but  notwithstanding  the  most  subtle  distinc- 
tion, wit  and  humor  blend,  run  into  each  other.  This  is 
true  of  speculation  and  gambling.  The  reform  has  some 
elements  of  chance;  the  latter  some  of  the  elements  of 
reason.  We  define  as  best  we  can.  Speculation  is  a  venture 
based  upon  calculation.  Gambling  is  a  venture  without 
calculation.  The  law  makes  this  distinction:  it  sustains 
speculation,  and  condemns  gambling.  All  business  is  more 
or  less  speculative.  The  term  speculation,  however,  is  com- 
monly restricted  to  business  of  exceptional  uncertainty. 
The  uninitiated  believe  that  chance  is  so  large  a  part  of 
speculation  that  it  is  subject  to  no  rules,  is  governed  by 
no  laws.    This  is  a  serious  error. — Unknown  writer. 

Is  a  broker  a  trader,  a  speculator  or  a  manipulator  a 
gambler?     Or  are  all  four  gamblers?     An  old  speculator 
takes  this  somewhat  humorous  view  of  the  question:     "I 
am  not  a  gambler — the  broker  is  the  gambler — I  am  the  ■ 
lamb,  unshorn  it's  true,  but  nevertheless  the  victim  of  a 


22  THE     ABC     OF     STOCK     SPECULATION. 

bad  habit.  If  I  enter  a  gambling  house  and  make  a  few 
wagers  I  would  resent  the  imputation  that  I  was  a  gam- 
bler. I  am  not  a  gambler  or  at  the  worst  only  an  amateur 
at  the  game  and  then  for  a  few  minutes  only.  The  man 
who  backs  the  game  and  runs  the  gambling  house  is  the 
professional  gambler.  Now  the  broker  occupies  much  the 
same  relationship  to  the  stock  gambling  game  that  the 
man  with  the  cards  and  wheel  does  to  his  peculiar  trade. 
Of  course  behind  the  stock  broker  there  is  the  manipulator 
and  the  game  itself.  The  broker  does  not  lose  out  his  own 
money  unless  he  'buckets'  his  orders  (when  he  is  a  gambler 
as  is  every  bucket  shop  operator)  so  he  is  only  a  'croupier' 
so  to  speak,  for  the  game.  A  stock  speculator  whose  only 
source  of  income  is  stock  speculation  on  a  margin  may 
fairly  call  himself  a  gambler." 

Speculation  and  gambling,  as  the  words  are  used  to-day, 
are  substantially  interchangeable,  but '  nevertheless  there 
is  a  marked  distinction  between  the  two.  All  speculators 
are  not  necessarily  gamblers,  although  all  stock  gamblers 
(traders)  are  speculators.  When  speculation  in  stocks  be- 
comes gambling  in  stocks,  the  operations  are  usually  con- 
fined to  transactions  made  on  a  margin. 

For  example:  A  walks  in  a  broker's  office  and  asks: 
"What  do  you  think  of  the  market?"  "We  hear,"  is  the 
reply,  "that  St.  Paul  is  a  purchase  at  the  opening  for  a  rise 
of  several  points."  "Very  well,  buy  me  100  shares,  sell  at 
2  points  profit  and  stop  the  loss  at  1  point."  Obviously 
this  is  a  wager  in  which  the  gambling  factor  is  very  strong 
and  the  maker  regards  himself  as  a  gambler. 

Example  I^o.  2.    B  enters  the  same  office,  asks  the  same 


THE     ABC     OF    STOCK    SPECULATION.  23 

question,  receives  the  same  reply  and  says:  "Very  well, 
buy  me  100  shares,  send  the  certificate  to  my  office  and  I 
will  give  you  a  check  for  it."  B  buys  his  stock  outright 
and  would  not  buy  a  single  share  on  a  margin.  He  will 
admit  that  he  is  a  speculator,  but  will  be  insulted  if  you 
call  him  a  gambler. 

Example  No.  3.  C  is  a  trader  and  an  Exchange  mem- 
ber. Ask  him  his  business  and  he  will  reply  that  he  is  a 
trader.  Ask  him  to  define  a  trader  and  he  will  say:  "As 
far  as  I  am  concerned  a  trader  is  a  gambler.  I  never  go 
homo  long  or  short  a  share  of  stock.  I  take  advantage  of 
the  smallest  changes  in  the  market  limiting  my  losses  to 
the  minimum — %s  and  ^4^ — aiid  take  equally  small  pro- 
fits, although  I  am  glad  to  get  larger  ones.  I  excel  at 
calling  the  successive  changes,  trade  on  either  side,  and 
have  no  pronounced  views  as  to  whether  it  is  a  bull  or  bear 
market." 

All  bucket  shop  operators  and  traders  are  gamblers. 

Investors  are  not  gamblers. 

Brokers  and  manipulators  are  not  necessarily  gamblers, 
the  circumstances  governing  individual  cases. 

The  case  of  B  will  doubtless  cause  discussion,  but  his 
view  is  that  he  is  no  more  a  gambler  than  the  man  who 
buys  a  parcel  of  real  estate  on  a  10  per  cent,  equity  or  the 
merchant  who  buys  and  sells  goods  in  expectation  of  a  rise 
or  fall. 

But  stock  speculation  does  not  owe  its  importance  to  the 
classes  of  speculators  enumerated  as  closely  allied  to  the 
gambler.  On  the  contrary  they  are  in  the  minority.  Gam- 
bling may  at  times  be  an  unavoidable  accompaniment  of 


24  THE     ABC     OF     STOCK     SPECULATION", 

stock  speculation,  but  stock  speculation  is  so  interwoven 
with  the  money  market  and  the  commerce  of  the  country 
that  to  eliminate  it  from  the  world  of  business  would  be 
for  civilization  to  take  a  long  backward  step. 

Criticism  of  stock  speculation  as  of  other  trades,  arts 
and  sciences,  to  be  intelligent,  should  be  discriminating. 
Pulpit  and  press  at  times  denounce  stock  speculation  as  if 
the  Stock  Exchange  and  Wall  Street  were  hotbeds  of  cor- 
ruption. 

No  well-informed  man  questions  the  usefulness  of  the 
Stock  Exchange  or  stock  speculator.  Stock  Exchange 
prices  register  values  and  the  state  of  trade,  precisely  as  a 
thermometer  registers  heat  or  cold.  The  stock  market  is 
the  most  highly  organized  and  delicately  adjusted  market 
in  the  world.  It  offers  to  the  public  at  large  securities 
which  are  good  collaterals  at  any  bank  and  securities  which 
on  any  business  day  can  be  sold  for  cash.  It  gives  the 
money  market  great  elasticity.  It  is  a  safeguard  provided 
for  unexpected  demands  upon  the  money  market,  and  fur- 
nishes a  medium  of  exchange  that  minimizes  the  use  of 
gold  in  international  operations.  It  is  a  most  important 
part  of  the  modern  system  of  credit.  Eliminate  the  stock 
market  and  transferable  securities  from  the  life  of  the 
country  to-day  and  contemplate  if  good  can  be  the  result 
of  a  demand  from  Europe  for  its  credit  balances  to  be  paid 
in  gold.  The  result  would  paralyze  industrial  progress. 
The  Stock  Exchange  facilitates  the  employment  of  capital, 
adds  to  its  productiveness,  is  an  accurately  registering 
machinery  of  credit  indispensable  to  the  banks  of  the  coun- 
try, and  is  a  guiding  force  for  the  merchant  and  financier. 


THE     ABC     OF     STOCK     SPECULATION".  26 


CHAPTEE  IV. 

The  Morality  of  Wall  Street. 

A  leading  newspaper,  commented  (1903)  editorially  on 
the  morality  of  Wall  Street.  Part  of  the  burden  of  its 
comment  was  that  it  was  different  in  some  respects  from 
morality  elsewhere.  Taking  the  word  "morality"  to  mean 
in  this  instance  the  general  law  or  code  of  ethics  obtain- 
ing in  Wall  Street  and  elsewhere,  it  does  not  appear  that 
there  is  any  essential  difference  between  Wall  Street  mor- 
ality and  general  business  morality. 

The  object  of  all  business  is  the  "making  of  money" 
and  nothing  else.  Wall  Street  is  certainly  no  different 
from  any  other  place  or  center  of  business  activity  in  this 
respect.  Where  one  business  center  or  group  of  industries 
differs  from  another  in  the  matter  of  morality  is  probably 
only  in  the  details  of  its  code.  Now,  in  the  details  of  its 
code  Wall  Street  will  compare  to  advantage  with  most 
other  business  centers.  As  has  been  pointed  out,  its  ma- 
chinery is  predicated  upon  rigid  observance  of  bargains 
made  and  word  passed.  While  it  is  true  that  this  kind  of 
honor  is  absolutely  necessary  for  the  smooth  conduct  of 
business  as  it  is  carried  on  in  Wall  Street,  it  is  also  true 
that  the  high  standard  required  is  lived  up  to  by  the  Street, 
and  breaches  thereof  are  extremely  rare. 

Perhaps  one  reason  why  there  is  so  much  disposition  to 


26  THE     ABC     OF     STOCK     SPECULATION. 

question  the  morality  of  Wall  Street  and  contrast  it  un- 
favorably with  the  morality  of  other  business  centers  is  the 
fact  that  in  Wall  Street  probably  to  a  greater  extent  than 
elsewhere  the  primal  passions  and  instincts  of  acquisitive- 
ness and  self-preservation  wear  less  disguise  than  they  do 
in  the  other  channels  of  industry  and  money  making.  A 
Stock  Exchange  anywhere  is  a  theatre  in  which  these 
primal  passions  battle  as  gladiators  in  the  arena  without 
concealment  or  pretense.  Every  one  who  goes  down  into 
the  arena  knows  that  it  is  a  battle  wherein  his  hand  must 
keep  his  head,  and  the  penalty  of  failure  will  be  exacted 
against  him  to  the  utmost.  "A  la  guerre  comme  a  la 
guerre"  is  a  proverb  that  very  well  describes  the  conditions 
under  which  business  is  done  in  Wall  Street.  Elsewhere 
it  may  appear  to  be  different.  The  only  difference  is  that 
in  Wall  Street  there  is  no  pretense,  no  disguise;  the  essen- 
tial struggle  is  the  same  everywhere.  In  Wall  Street, 
there  has  been  and  unfortunately  still  is  at  times  fraud 
in  detail  peculiar  to  Wall  Street,  but  it  is  not  of  Wall 
Street  nor  inherent  in  the  laws  of  the  game. 

It  is  true  that  speculation  in  Wall  Street  is  looked  upon 
as  being  especially  immoral  by  comparison  with  specula- 
tion elsewhere.  It  is,  however,  j)art  of  almost  every  manu- 
facturer's business  or  of  every  merchant's  business  to  specu- 
late in  raw  materials  or  goods,  and  nobody  thinks  of 
finding  fault  with  either  for  doing  so.  In  Wall  Street 
speculation  stands  alone,  without  any  business  disguise,  for 
all  men  to  see.  There  is  no  difference  between  one  kind  of 
speculation  and  another  so  far  as  essence  is  concerned; 
the  only  difference  is  that  one  is  disguised  and  the  other  is 


THE     ABC     OF     STOCK     SPECULATIOIST.  27 

not.  It  may  be  noted,  moreover,  that  where  the  speculation 
is  not  disguised  it  is  apt  to  be  more  honest  than  where  it 
hides  under  a  cloak  of  business  enterprise.  All  men  are 
gamblers  and  always  will  be  more  or  less  for  the  "get  rich 
quick"  idea,  and  the  chances  of  "something  for  nothing" 
will  always  prove  irresistibly  attractive  to  human  nature. 

The  plain  fact  of  the  matter  is  that  the  general  sus- 
picion of  and  hostility  toward  Wall  Street  find  their  root 
in  the  fact  that  the  race  for  money  is  carried  on  simply, 
openly  in  the  light  of  day,  without  pretense  or  hypocrisy 
of  any  kind,  and  without  attempt  to  cloak  the  passions  that 
have  existed  since  man  first  came  upon  the  earth.  If  gam- 
bling be  wrong,  the  principal  charge  that  can  be  levied 
against  Wall  Street  is  that  it  is  there  carried  on  openly, 
under  simple  but  rigid  rules,  and  Wall  Street  does  not 
care  who  knows  it.  Elsewhere  it  goes  on  in  essence  just 
the  same,  but  disguised  in  a  multitude  of  ways.  In  these 
days  most  forms  of  business  must  of  their  very  nature  con- 
tain a  large  element  of  speculation.  We  do  not  see  that 
speculation  becomes  more  immoral  by  being  openly  carried 
on. 

Wall  Street  has  rather  less  use  for  an  habitual  liar  than 
have  other  places.  It  has  no  use  at  all  for  a  man  who 
does  not  keep  his  word.  It  may  be  true  that  honesty  is  the 
best  policy  in  Wall  Street,  simply  for  reasons  of  conven- 
ience, but  that  it  is  the  best  policy  no  one  can  deny.  In 
fact,  it  is  the  only  policy  that  in  the  long  run  is  successful. 
We  do  not  think  that  this  is  necessarily  an  argument 
against  the  morality  of  Wall  Street. 


28  THE    ABC     OF     STOCK     SPECULATION. 


CHAPTEE  Y. 
*  Scientific  Speculation. 

The  question  whether  there  is  such  a  thing  as  scientific 
speculation  is  often  asked.  Various  answers  of  a  somewhat 
affirmative  character  have  been  given  but  they  have  gener- 
ally been  hedged  about  with  so  many  qualifications  as  to 
be  nearly  useless  for  practical  purposes.  The  experiences 
of  operators  have,  however,  crystallized  into  some  general 
rules  worth  heeding. 

The  maxim  "buy  cheap  and  sell  dear"  is  as  old  as  specu- 
lation itself,  but  it  leaves  unsolved  the  question  of  when  a 
security  of  a  commodity  is  cheap  and  when  it  is  dear,  and 
this  is  the  vital  point. 

The  elder  Rothschilds  are  said  to  have  acted  on  the 
principle  that  it  was  well  to  buy  a  property  of  known 
value  when  others  wanted  to  sell  and  to  sell  when  others 
wanted  to  buy.  There  is  a  great  deal  of  sound  wisdom  in 
this.  The  public,  as  a  whole,  buys  at  the  wrong  time  and 
sells  at  the  wrong  time.  The  reason  is  that  markets  are 
made  in  part  by  manipulation  and  the  public  buys  on 
manipulated  advances  and  after  they  are  well  along. 
Hence  it  buys  at  the  time  when  manipulators  wish  to  sell 
and  sells  when  manipulators  wish  to  buy. 

In  some  commission  offices,  there  are  traders  who,  as  a 
rule,  go  against  whatever  the  outside  customers  of  the 

*Dow'»  Theory. 


THE     ABC     OF     STOCK     SPECULATION,  29 

house  are  doing.  When  members  of  the  firm  say,  "all  our 
customers  are  getting  long  of  stocks/'  these  traders  sell 
out;  but  they  buy  when  the  firm  says,  "the  customers  are 
all  short."  There  are  of  course,  exceptions  to  this  rule. 
If  there  were  no  exceptions,  the  keepers  of  bucket  shops 
would  all  get  rich.  When  the  market  has  an  extraordinary 
rise,  the  public  makes  money,  in  spite  of  beginning  its  pur- 
chases at  what  would  ordinarily  be  the  wrong  time,  and 
this  is  when  the  bucket  shops  either  lose  their  money  or 
close  out  in  order  to  keep  such  money  of  customers  as 
they  have  in  hand. 

All  this  points  to  the  soundness  of  the  Eothschild  prin- 
ciple of  buying  a  property  of  known  value  when  the  pub- 
lie  generally  is  disposed  to  sell;  or  of  selling  it  when  the 
general  public  thinks  it  a  time  to  buy. 

Daniel  Drew  used  to  say,  "cut  your  losses  short,  but  let 
your  profits  run."  This  was  good  preaching,  bvit  "Uncle 
Dan"  did  not,  in  his  later  years,  practice  his  rule,  when  it 
would  have  been  better  for  him  if  he  had.  The  thought 
here  is  unquestionably  one  of  the  sound  principles  in  trad- 
ing. It  means  that  if  a  stock  has  been  purchased  and  it 
goes  up,  it  is  well  to  wait ;  but  if  it  goes  down,  it  is  well  to 
stop  the  loss  quickly  on  the  ground  that  the  theory  on 
whicli  the  purchase  was  made  was  wrong. 

The  public,  as  a  whole,  exactly  reverses  this  rule.  The 
average  operator,  when  he  sees  two  or  three  points  profit, 
takes  it ;  but,  if  a  stock  goes  against  him  two  or  three 
points,  he  holds  on  waiting  for  the  price  to  recover,  with, 
oftentimes,  the  result  of  seeing  a  loss  of  two  or  three  points 
run  into  a  loss  of  ten  points.     He  then  becomes  discour- 


30  THE     ABC     OF     STOCK     SPECULATION. 

aged  and  sells  out  near  the  bottom  to  protect  the  margin  in 
which  he  has  left. 

How  many  operators  in  looking  over  their  books  find 
a  considerable  number  of  small  profits  swept  away  by  one 
large  loss?  When  a  trader  finds  by  his  accounts  that  his 
profits  have  been  relatively  large  and  his  losses  relatively 
small,  he  can  make  up  his  mind  that  he  is  learning  how 
to  trade. 

The  trouble  with  carrying  out  this  plan  is  that  a  series 
of  losses  of  from  II/2  to  2  points  are  very  discouraging. 
A  trader  who  sees  that  he  has  taken  twice  or  three  times 
a  loss  of  two  points  when,  if  he  had  waited  a  few  days  he 
need  not  have  taken  any  loss,  is  very  apt  to  decide  that  he 
will  not  cut  his  losses  short  any  more,  but  will  wait,  and 
this  is  the  time  when  the  recovery  does  not  come. 

Mr.  Jay  Gould  said  his  policy  was  to  endeavor  to  fore- 
see future  conditions  in  a  property  and  then,  having  made 
his  commitments  carefully,  to  exercise  great  patience  in 
awaiting  results.     This  also  is  sound  doctrine,  but  pro- 
;  ceeds  along  very  different  lines.     Assuming  the  ability  to 
'  foresee  the  future,  it  is  the  wisest  of  all  courses ;  but  many 
who  have  tried  this  method  have  found  that  the  omission 
I  of  essential  factors  made  their  forecast  valueless,  and  both 
■  their  courage  and  their  patience  of  little  avail.    Neverthe- 
;  less,  this  method  should  not  be  discarded  on  account  of  the 
I  difficulties  involved.     Within  limitations,  the  future  can 
be  foreseen.     The  present  is  always  tending  toward  the 
future  and  there  are  always  in  existing  conditions  signals 
of  danger  or  encouragement  for  those  who  read  with  care. 


THE     ABC     OF     STOCK:    SPECULATION.  31 

CHAPTEK  VI. 
♦The  Two  General  Methods  of  Trading. 

There  are  two  general  methods  of  trading.  One  is  to 
deal  in  active  stocks  in  comparatively  large  amounts,  rely- 
ing for  protection  upon  stop  orders.  In  this  method  of 
trading  it  is  not  necessary  to  know  much  about  the  values. 
The  point  of  chief  importance  is  that  the  stock  should  be 
active  enough  to  permit  the  execution  of  the  stop  order  at 
the  point  selected  so  as  to  cut  losses  short.  The  operator, 
by  this  method,  guesses  which  way  the  stock  will  move. 
If  he  guesses  right,  he  lets  his  profits  run.  If  he  guesses 
wrong,  he  goes  out  on  the  stop  order.  If  he  can  guess 
right  as  often  as  he  can  guess  wrong,  he  is  fairly  sure  of 
profits. 

The  other  system  is  an  entirely  different  proposition. 
It  starts  with  the  assumption  that  the  operator  knows  ap- 
proximately the  value  of  the  stock  in  which  he  proposes  to 
deal.  It  assumes  that  he  has  considered  the  tendency  of 
the  general  market;  that  he  realizes  whether  the  stock  in 
which  he  proposes  to  deal  is  relatively  up  or  down,  and 
that  he  feels  .sure  of  its  value  for  at  least  months  to  come. 

Suppose  this  to  exist :  The  operator  lays  out  his  plan  of 
campaign  on  the  theory  that  he  will  buy  his  first  lot  of 
stock  at  what  he  considers  the  right  price  and  the  right 
time,  and  will  then  buy  an  equal  amount  every  1  per  cent, 
down  as  far  as  the  decline  may  go. 

♦  Dow's  Theory. 


32  THE     ABC     OF     STOCK     SPECULATION. 

This  method  of  trading  is  the  one  generally  employed  by 
large  operators.  They  know  the  value  of  the  stock  in  which 
they  propose  to  deal,  and  are  therefore  reasonably  secure  in 
following  a  decline.  They  feel  about  a  stock  as  merchants 
feel  about  buying  staple  goods.  If  an  article  is  cheap  at 
$100,  they  know  it  is  cheaper  at  $90,  and  will  strain  a 
point  to  buy  at  $80  or  at  $70,  knowing  that  the  price  must 
recover.  This  is  the  way  a  large  operator  looks  at  his 
favorite  stocks  and  this  is  why  he  generally  makes  money 
in  them. 

The  disadvantage  of  the  small  operator  in  following 
this  method  is  two-fold.  He  does  not  absolutely  know  the 
value  of  the  stock.  That  is,  he  may  know  the  truth  up  to  a 
certain  point,  but  beyond  that  is  an  unknown  factor  which 
interferes  with  the  result.  When  the  price  of  a  stock  de- 
clines considerably,  the  small  operator  always  fears  that 
he  has  overlooked  something  of  importance,  and  he  is  there- 
fore tempted  to  sell  instead  of  averaging  his  holdings. 
The  second  disadvantage  of  the  small  operator  in  fol- 

\  lowing  this  policy  is  that  he  seldom  provides  sufficient 
capital  for  his  requirements.  Thousands  of  speculators 
believe  that  because  10  per  cent,  is  a  common  speculative 

1  margin,  that  $1,000  justifies  them  in  trading  in  hundred 
share  lots.    This  impression  produces  losses  continually. 

The  man  who  has  $1,000  for  speculation  is  not  well 
equipped  for  trading  in  even  10  share  lots,  if  he  proposes 
to  deal  on  a  scale.  A  comparison  of  high  and  low  prices 
of  active  stocks  shows  frequently  a  difference  of  30  points 
in  a  year.  Any  operator  proposing  to  follow  a  stock  down, 
buying  on  a  scale,  should  make  his  preparations  for  a 


THE     ABC     OF     STOCK     SPECULATION.  33 

possible  fall  of  from  20  to  30  points.  Assuming  that  he 
does  not  begin  to  buy  until  his  stock  is  5  points  down  from 
the  top,  there  is  still  a  possibility  of  having  to  buy  30  lots 
before  the  turn  will  come. 

If,  however,  an  outsider  will  provide  $2,500  as  his  specu- 
lative capital  and  will  trade  in  ten-share  lots  in  a  thor- 
oughly good  railroad  stock,  beginning  his  purchases  only 
after  a  decline  of  five  points  in  a  rising  market,  and  ten 
points  in  a  bear  market,  following  the  decline  with  pur- 
chases every  point  down,  and  retaining  all  the  stock 
bought,  he  seldom  need  make  a  loss. 

Such  campaigns  require  time,  patience,  and  the  pur- 
suance of  a  fixed  policy,  but  whoever  will  follow  this 
policy  will  find  himself  able  to  get  a  high  rate  of  interest 
on  the  capital  invested.  It  is  an  old  saying  in  Wall 
Street  that  the  man  who  begins  to  speculate  in  stocks  with 
the  intention  of  making  a  fortune,  usually  goes  broke, 
whereas  the  man  who  trades  with  a  view  of  getting  good 
interest  on  his  money,  sometimes  gets  rich. 

This  is  only  another  way  of  saying  that  money  is  made 
by  conservative  trading  rather  than  by  the  effort  to  get 
large  profits  by  taking  largo  risks.  After  allowing  for 
all  the  risks  involved,  we  think  the  outsider  who  wants  to 
trade  in  stocks  has  a  better  chance  working  in  small  lots 
on  a  scale  than  in  any  other  way,  provided  he  will  pay 
attention  to  certain  essential  points,  which  for  convenience 
of  reference  we  will  enumerate  in  order. 

1. — Bull  markets  and  bear  markets  run  four  and  five 
years  at  a  time.  Determine  by  the  average  prices,  which 
one  is  under  way. 


34  THE     ABC     OF     STOCK     SPECULATION. 

2.     Determine  the  stock  or  stocks  to  trade  in.     They 

should  be  railroad  stocks,  dividend  payers,  not  too  low,  nor 

too  high,  fairly  active,  and  for  the  bull  side  below  their 

value;  for  the  bear  side  above  their  value.    Values  are  de- 

■  termined  roughly  by  the  earnings  available  for  dividends. 

3. — Observe  the  position  of  your  stock  with  relation  to 
recent  fluctuations.  In  a  bull  market,  the  time  to  begin  to 
buy  is  when  a  stock  has  had  four  or  five  points  decline  from 
the  last  previous  top.  In  a  bear  market,  the  time  to  begin 
to  sell  is  when  such  a  stock  has  had  three  or  four  points 
rally  from  the  bottom. 

4.- — Stick  to  the  stock  bought  until  a  fair  profit  or  until 
there  is  good  reason  for  deciding  that  the  first  estimate  of 
value  was  wrong.  Eemember  that  an  active  stock  will  gen- 
erally rally  from  %  per  cent,  to  %  per  cent,  of  the  amount 
of  its  decline  under  adverse  conditions  and  more  than  that 
under  favorable  conditions. 

5. — Have  money  enough  to  see  a  decline  through  with- 
out becoming  uneasy  or  over-burdened.  $2,500  ought  to 
take  care  of  a  ten-share  scale  every  point  down — that  is 
to  say,  supposing  the  first  lot  to  be  bought  five  points  down 
from  the  top,  $2,500  ought  to  carry  the  scale  until  the 
natural  recovery  from  the  low  point  brings  the  lot  out  with 
a  profit  on  the  average  cost.  It  will  not  do  to  expect  a 
profit  on  every  lot,  but  only  on  the  average.  In  a  bull 
k  market  it  is  better  to  always  work  on  the  bull  side;  in  a 
bear  market,  on  the  bear  side.  There  are  usually  more 
rallies  in  a  bear  market  than  there  are  relapses  in  a  bull 
market. 
'  6. — ^Do  not  let  success  in  making  money  in  ten-share 


THE     ABC     OF     STOCK     SPECULATION.  35 

lots  create  a  belief  that  a  bolder  policy  will  be  wiser  and 
begin  to  trade  in  100-sliare  lots  with  inadequate  capital. 
A  few  hundred-share  losses  will  wipe  out  a  good  many  ten- 
share  profits. 

7. — There  is  not  usually  much  difficulty  in  dealing  in 
ten-share  lots  on  the  short  side.  If  one  l^roker  does  not 
wish  to  do  it.  another  probably  will,  especially  for  a  cus- 
tomer who  amply  protects  his  account  and  who  seems  to 
understand  what  he  is  doing. 


36  THE     ABC     OF     STOCK     SPECULATION. 


CHAPTER  yil. 

♦Three  General  Lines  of  Eeasoning. 

We  have  spoken  in  a  preceding  article  of  the  fact  that 
the  experience  of  great  interests  in  the  market  seems  to 
have  crystallized  into  three  general  lines  of  reasoning. 

The  first  is  that  the  surface  appearance  of  the  market 
is  apt  to  be  deceptive.  The  second  is  that  it  is  well  in 
trading  to  cut  losses  short  and  let  profits  run.  The  third 
is  that  correctly  discounting  the  future  is  a  sure  and  easy 
road  to  wealth.  The  problem  is  how  these  rules  which  are 
undoubtedly  sound,  can  be  operated  in  a  practical  way. 

Let  us  take  first  the  action  of  the  general  market  with 
reference  to  the  time  to  buy.  The  market  is  always  to  be 
considered  as  having  three  movements,  all  going  on  at  the 
sam,e  time.  The  first  is  the  narrow  movement  from  day 
to  day.  The  second  is  the  short  swing,  running  from  two 
weeks  to  a  month  or  more;  the  third  is  the  main  move- 
ment covering  at  least  four  years  in  its  duration. 

The  day  to  day  movement  should  be  disregarded  by 
everybody,  except  traders,  who  pay  no  commissions.  The 
medium  swing  is  the  one  for  ordinary  consideration.  The 
outside  trader  should  not  attempt  to  deal  in  more  than 
two  or  three  stocks  at  a  time.  He  should  keep  a  chart  of 
the  price  movements  of  these  stocks  so  as  to  know  their 
swings  for  months  or  years,  and  thus  be  able  to  tell  readily 

♦Dow's  Theory. 


THE     ABC     OF     STOCK     SPECULATION.  37 

where  in  the  general  swing  his  particular  stocks  appear 
to  be. 

He  should  keep  with  his  price  movement  a  record  of  the 
volume  of  transactions  and  notes  of  any  special  facts 
bearing  on  that  property,  such  as  increases  or  decreases 
in  earnings,  increases  in  fixed  charges,  development  of 
floating  debt,  and  above  all  the  actual  dividend  earnings 
as  shown  from  month  to  month.  He  should  observe  the 
movement  of  the  general  market  as  indicated  by  the  aver- 
ages published  daily,*  as  this  shows  the  market  more 
clearly  than  it  is  shown  by  any  one  stock. 

The  main  purpose  of  this  study  is  to  enable  the  trader 
to  determine,  first,  the  value  of  the  stock  he  is  in ;  whether 
it  is  increasing  or  decreasing  and,  second,  when  the  time 
to  buy  seems  opportune.  Assuming  the  thirty  day  swing 
to  be  about  5  points,  it  is  in  the  highest  degree  desirable 
not  to  buy  when  three  of  these  points  have  passed,  as  such 
a  purchase  limits  the  probable  profits  to  about  two  points. 

It  is  therefore  generally  wise  to  look  for  a  low  point  on 
a  decline.  Suppose,  for  instance,  that  Union  Pacific  was 
the  stock  under  consideration;  that  it  was  clearly  selling 
below  its  value,  and  that  a  bull  market  for  the  four-year 
period  was  under  way.  Assuming  further  that  in  a  period 
of  reaction  Union  Pacific  had  fallen  four  points  from  the 
previous  highest.  Assume  earnings  and  prospects  to  be 
favorable  and  the  outlook  for  the  general  market  to  be 
about  normal. 

This  would  be  the  time  to  begin  to  buy  Union  Pacifies. 
The  prudent  trader,  however,  would  take  only  part  of  Jiis 
line.     He  would  buy  perhaps  one-half  of  the  stock  he 

*Se«  Wall  Street  Journal. 


38  THE     ABC     OF     STOCK     SPECULATION. 

wanted  and  then  give  an  order  to  buy  the  remainder  as 
the  price  declined.  The  fall  might  go  much  further  than 
he  anticipated.  It  might  be  necessary  to  wait  a  long  time 
for  profit.  There  might  even  be  developments  which 
would  make  it  wise  to  throw  over  the  stock  bought  with 
the  hope  of  replacing  it  materially  lower. 

These,  however,  are  all  exceptions.  In  a  majority  of 
cases  this  method  of  choosing  the  time  to  buy,  founded 
upon  clear  perception  of  value  in  the  stock  chosen  and 
close  observation  of  the  market  swings  under  way  will 
enable  an  operator  to  secure  stock  at  a  time  and  at  a  price 
which  will  give  fair  profits  on  the  investment. 


THE    ABC     OF    STOCK     SPECULATION.  39 

CHAPTER  VIII. 

*  Swings  Within  Swings. 

A  correspondent  asks:  "For  some  time  you  have  been 
writing  rather  bullish  on  the  immediate  market,  yet  a 
little  bearish  in  a  larger  sense.  How  do  you  make  this 
consistent  ?^' 

We  get  this  question  in  one  form  or  another  rather  fre- 
quently. It  denotes  a  lack  of  familiarity  with  fluctua- 
tions in  prices  when  viewed  over  considerable  periods. 
Many  people  seem  to  think  that  the  change  in  prices  in 
any  one  day  is  complete  in  itself  and  bears  no  relation  to 
larger  movements  which  may  be  under  way.  This  is 
not  so. 

Nothing  is  more  certain  than  that  the  market  has  three 
well  defined  movements  which  fit  into  each  other.  The 
first  is  the  daily  variation  due  to  local  causes  and  the  bal- 
ance of  buying  or  selling  at  that  particular  time.  The 
secondary  movement  covers  a  period  ranging  from  ten 
days  to  sixty  days,  averaging  probably  between  thirty  and 
forty  days.  The  third  move  is  the  great  swing  covering 
from  four  to  six  j'cars. 

In  thinking  about  the  market,  it  is  necessary  to  think 
with  reference  to  each  of  these  periods  in  order  to  take 
advantage  of  opportunities.  If  the  main  move  is  up,  re- 
lapses are  speculators'  opportunities,  but  if  the  main  move 
is  down,  rallies  furnish  these  opportunities. 

*  Dow's  Theory. 


40  THE     ABC     OP     STOCK     SPECULATION. 

Losses  should  not  generally  be  taken  on  the  long  side 
in  a  bull  period.  Nor  should  they  generally  be  taken  on 
the  short  side  in  a  bear  period.  It  is  a  bull  period  as  long 
as  the  average  of  one  high  point  exceeds  that  of  previous 
high  points.  It  is  a  bear  period  when  the  low  point  be- 
comes lower  than  the  previous  low  points.  It  is  often  diffi- 
cult to  judge  whether  the  end  of  an  advance  has  come 
because  the  movement  of  prices  is  that  which  would  occur 
if  the  main  tendency  had  changed.  Yet,  it  may  only  be 
an  unusually  pronounced  secondary  movement. 

The  first  thing  for  any  operator  to  consider  is  the  value 
of  the  stock  in  which  he  proposes  to  trade.  The  second  is 
to  determine  the  direction  of  the  main  movement  of 
prices.  We  know  of  nothing  more  instructive  on  this 
point  than  the  course  of  prices  as  printed  daily.*  The 
third  thing  is  to  determine  the  position  of  the  secondary 
swing. 

Assume  for  instance  that  the  stock  selected  was  Union 
Pacific;  that  the  course  of  prices  afforded  clear  evidence 
of  a  bull  market  under  way;  that  the  high  point  in  Union 
Pacific  thirty  days  ago  was  108 ;  that  the  price  had  slowly 
declined  in  sympathy  with  the  market  and  without  special 
new  features  to  98.  The  chances  would  be  in  favor  of 
buying  a  part  of  the  line  wanted  at  that  price  with  the 
intention  of  buying  a  little  more  if  the  stock  had  further 
decline  or  if  the  price  showed  a  well  defined  advancing 
tendency.  It  would  then  be  wise  to  watch  the  general 
market  and  wait  for  an  advance. 

A  10-point  decline  under  such  conditions  would  be  al- 
most certain  to  bring  in  a  bull  market  more  than  5  points 

*  See  Wall  Street  Journal. 


THE     A  B  C     OP     STOCK     SPECULATION^ .  41 

recovery  and  full  10  points  would  not  be  unreasonable; 
hence  if  the  general  market  maintained  a  good  tone,  it 
would  be  wise  to  wait  for  5  points  and  then  begin  to  think 
about  stoj)  orders. 

Even  in  a  bear  market,  this  method  of  trading  will 
usually  be  found  safe,  although  the  profit  taken  should  be 
less  because  of  the  liability  of  weak  spots  breaking  out 
and  checking  the  general  rise. 


42  THE     ABC     OF     STOCK     SPECULATION. 


CHAPTER  IX. 
♦Methods  of  Eeading  the  Market. 

A  correspondent  writes :  "Is  there  any  way  of  forecast- 
ing the  course  of  the  market  from  the  tape,  from  your  rec- 
ords of  transactions  or  from  the  summarized  movement 
of  prices?  Transactions  must  mean  something,  but  how 
can  a  trader  tell  what  they  mean?" 

This  is  an  old  question.  There  have  been  a  variety  of 
answers  but  it  is  doubtful  if  any  have  been  or  can  be 
wholly  satisfactory.  Several  methods,  however,  are  in 
practical  use  and  at  times  afford  suggestions. 

There  is  what  is  called  the  book  method.  Prices  are  set 
down,  giving  each  change  of  1  point  as  it  occurs,  forming 
thereby  lines  having  a  general  horizontal  direction  but 
running  into  diagonals  as  the  market  moves  up  and  down. 
There  come  times  when  a  stock  with  a  good  degree  of 
activity  will  stay  within  a  narrow  range  of  prices,  say  2 
points,  until  there  has  formed  quite  a  long  horizontal  line 
of  these  figures.  The  formation  of  such  a  line  sometimes 
suggests  that  stock  has  been  accumulated  or  distributed, 
and  this  leads  other  people  to  buy  or  sell  at  the  same  time. 
Eecords  of  this  kind  kept  for  the  last  fifteen  years  seem 
to  support  the  theory  that  the  manipulation  necessary  to 
acquire  stock  is  often  times  detected  in  this  way. 

Another  method  is  what  is  called  the  theory  of  double 

*Dow's  Theory. 


THE     ABC     OF     STOCK     SPECULATION.  43 

tops.  Kecords  of  trading  show  that  in  many  cases  when 
a  stock  reaches  top  it  will  have  a  moderate  decline  and 
then  go  back  again  to  near  the  highest  figures.  If  after 
such  a  move,  the  price  again  recedes,  it  is  liable  to  decline 
some  distance. 

Those,  however,  who  attempt  to  trade  on  this  theory 
alone  find  a  good  many  exceptions  and  a  good  many  tini?c 
when  signals  are  not  given. 

There  are  those  who  trade  on  the  theory  of  averages.  It 
is  true  that  in  a  considerable  period  of  time  the  market 
has  about  as  many  days  of  advance  as  it  has  of  decline. 
If  there  come  a  series  of  days  of  advance,  there  will  almost 
surely  come  the  balancing  days  of  decline. 

The  trouble  with  this  system  is  that  the  small  swings 
are  always  part  of  the  larger  swings,  and  while  the  ten- 
dency of  events  equally  liable  to  happen  is  always  toward 
equality,  it  is  also  true  that  every  combination  possible  is 
liable  to  occur,  and  there  frequently  come  long  swings,  or, 
in  the  case  of  stock  trading,  an  extraordinary  number  of 
days  of  advance  or  decline  which  fit  properly  into  the 
theory  when  regarded  on  a  long  scale,  but  which  are  cal- 
culated to  upset  any  operations  based  on  the  expectation 
of  a  series  of  short  swings. 

A  much  more  practicable  theory  is  that  founded  on  the 
law  of  action  and  reaction.  It  seems  to  be  a  fact  that  a 
primary  movement  in  the  market  will  generally  have  a  sec- 
ondary movement  in  the  opposite  direction  of  at  least 
three-eighths  of  the  primary  movement.  If  a  stock  ad- 
vances 10  points,  it  is  very  likely  to  have  a  relapse  of  4 
points  or  more.     The  law  seems  to  hold  good  no  matter 


44  THE     ABC     OF     STOCK     SPECULATION, 

how  far  the  advance  goes.  A  rise  of  20  points  will  not 
infrequently  bring  a  decline  of  8  points  or  more. 

It  is  impossible  to  tell  in  advance  the  length  of  any 
primary  movement,  but  the  further  it  goes,  the  greater 
the  reaction  when  it  comes,  hence  the  more  certainty  of 
being  able  to  trade  successfully  on  that  reaction. 

A  method  employed  by  some  operators  of  large  experi- 
ence is  that  of  responses.  The  theory  involved  is  this: 
The  market  is  always  under  more  or  less  manipulation. 
A  large  operator  who  is  seeking  to  advance  the  market 
does  not  buy  -everything  on  the  list,  but  puts  up  two  or 
three  leading  stocks  either  by  legitimate  buying  or  by 
manipulation.  He  then  watches  the  effect  on  the  other 
stocks.  If  sentiment  is  bullish,  and  people  are  disposed 
to  take  hold,  those  who  see  this  rise  in  two  or  three  stocks 
immediately  begin  to  buy  other  stocks  and  the  market 
rises  to  a  higher  level.  This  is  the  public  response,  and  is 
an  indication  that  the  leading  stocks  will  be  given  an- 
~other  lift  and  that  the  general  market  will  follow. 

If,  however,  leading  stocks  are  advanced  and  others  do 
not  follow,  it  is  evidence  that  the  public  is  not  disposed  to 
buy.  As  soon  as  this  is  clear  the  attempt  to  advance  prices 
IS  generally  discontinued.  This  method  is  employed  more 
particularly  by  those  who  watch  the  tape.  But  it^an  be 
read,  at  the  close  of  the  day  in  our  record  of  transactions 
'.by  §e^ing  what  stocks  were  put  up  within  specified  hours 
and  whether  the  general  market  followed  or  not.  The 
best  way  of  reading  the  market  is  to  read  from  the  stand- 
point of  values.  The  market  is  not  like  a  balloon  plunging 
'hitlier  and  thither  in  the  wind.    As  a  whole,  it  represents 


THE     ABC     OF     STOCK     SPECULATION".  45 

a  serious,  well  considered  effort  on  the  part  of  far-sighted 
and  well-informed  men  to  adjust  prices  to  such  values  as 
exist  or  which  are  expected  to  exist  in  the  not  too  remote 
future.  The  thought  with  great  operators  is  not  whether 
a  price  can  be  advanced,  but  whether  the  value  of  property 
which  they  propose  to  buy  will  lead  investors  and  specu- 
lators six  months  hence  to  take  stock  at  figures  from  10 
to  20  points  above  present  prices. 

In  reading  the  market,  therefore,  the  main  point  is  to 
discover  what  a  stock  can  be  expected  to  be  worth  three 
months  hence  and  then  to  see  whether  manipulators  or  in- 
vestors are  advancing  the  price  of  that  stock  toward  those 
figures.  It  is  often  possible  to  read  movements  in  the 
market  very  clearly  in  this  way.  To  know  values  is  to 
comprehend  the  meaning  of  movements  in  the  market. 


46  THE    ABC     OF     STOCK     SPECULATION. 


CHAPTER  X. 

*  The  Operation  of  Stop  Orders. 

A  correspondent  inquires:  "My  brokers  advise  me  to 
protect  my  transactions  by  stop  orders.  It  seems  to  me 
that  stop  orders  may  be  good  for  brokers  by  giving  them 
commissions,  but  they  make  customers  take  unnecessary 
losses.     Do  you  advise  speculators  to  give  stop  orders?" 

Proof  on  this  point  is  afforded  by  taking  a  large  num- 
ber of  fluctuations  and  seeing  how  the  average  works  out. 
We  believe  that  for  the  margin  trader,  and  especially  the 
trader  who  operates  rather  more  largely  than  he  ought  on 
the  margin  that  he  has,  stop  orders  are  wise.  There  are, 
however,  many  qualifications  which  should  be  kept  in  mind. 

If  a  man  is  trading  as  a  semi-investor,  using  50  per  cent, 
margin,  depending  on  values  for  his  profit  and  operating 
in  harmony  with  the  main  tendency  of  the  market,  we  do 
not  think  a  stop  order  desirable.  To  explain  this  a  little 
more  fully:  Suppose  the  movement  of  averages  shows 
that  the  market  is  in  a  rising  period,  such  periods  usually 
covering  several  years  with  only  temporary  reversals  in  di- 
rection. Suppose  that  an  operator  finds  that  a  certain 
stock  is  earning  an  abnormal  percentage  on  its  market 
value,  or,  in  other  words,  is  intrinsically  cheap.  Suppose 
on  the  occasion  of  a  temporary  setback  this  stock  is  bought 
to  be  carried  for  months  if  necessary  until  the  price  has 

*Dow'«  Theory. 


THE     ABC     OF     STOCK     SPECULATION.  47 

risen  to  approximately  the  level  of  the  value.  A  stop  order 
is  folly  in  a  case  of  this  kind  with  anything  like  fair 
margin. 

But,  suppose  a  trader,  having  a  margin  of  two  or  three 
thousand  dollars,  wants  to  trade  in  and  out  of  stocks  with- 
out regard  to  values,  but  being  governed  by  points  or  by 
impressions  of  what  the  general  market  is  going  to  do. 
Experience  has  shown  that  such  a  trader  will,  in  the  end, 
profit  by  putting  a  stop  order  about  2  points  from  the 
price  at  which  he  goes  in.  If  there  is  advice  that  a  stock 
is  going  up  and  it  instead  goes  down  3  points  without 
some  obviously  good  reason  for  such  a  decline,  the  advice 
was  not  good,  and  the  quicker  the  speculator  lets  go  the 
better. 

It  often  happens  that  when  a  stock  moves  two  points  it 
moves  more,  and  it  is  a  peculiarity  of  the  human  mind  to 
disregard  a  small  loss,  but  to  get  frightened  and  take  a 
large  loss  just  when  wisdom  would  call  for  averaging  a 
purchase. 

Thousands  of  traders  have  said  at  two  points  loss  that 
they  would  see  that  particular  transaction  through  if  the 
stock  went  to  nothing,  only  to  decide  after  it  had  declined 
ten  points  that  there  was  good  reason  for  believing  that 
it  would  decline  ten  more  and  acting  accordingly.  The 
experience  of  most  traders  is  that  the  small  losses  oc- 
casioned by  stop  orders  have  a  tendency  to  check  their  trad- 
ing with  a  small  aggregate  loss,  while  the  practice  of  letting 
a  loss  run  not  infrequently  makes  a  loss  so  large  that 
trading  comes  to  an  end  because  the  speculator  has  no 
more  money. 


48  THE     ABC     OF     STOCK     SPECULATION. 

The  maxim  "let  your  profits  run,  but  cut  your  losses 
short"  has  received  the  approval  of  most  of  the  great 
stock  operators.  The  authorship  of  the  maxim  has  been 
credited  to  a  dozen  people,  and  most  of  them  would  have 
been  willing  to  father  it,  although  the  great  fortunes  in 
stocks  have  not  usually  been  made  by  people  who  give 
stop  orders.  Their  opinions  that  stop  orders  were  wise 
was  based  on  their  observation  of  people  who  tried  to 
trade  with  insufficient  capital,  to  whom  stop  orders  espe- 
cially apply. 
I  The  great  profits  in  stocks  have  almost  invariably  been 
made  by  people  who  saw  the  tendency  of  events  clearly, 
and  who  then  bought  a  large  amount  of  stock  which  they 
thought  certain  to  get  the  results  of  great  increase  in  pros- 
perity. Such  stock  has  either  been  paid  for  outright  or 
very  heavily  margined,  and  then  it  has  been  held  for 
months  or  years  until  great  profits  accrued. 

Take  the  opportunities  that  have  occurred  in  the  last 
six  years,  or  since  1896.  Any  one  of  from  twenty  to  forty 
stocks  could  have  been  bought  around  20  and  sold  above 
80,  and  in  at  least  half  the  cases  above  par,  within  that 
time.  Such  great  opportunities  do  not  come  every  year, 
but  there  are  few  times  when  some  stocks  cannot  be 
pointed  out  as  being  lower  in  price  than  in  value  and  as 
entitled  to  advance. 

In  a  close  speculative  sense,  a  stop  order  is  often  useful. 
Stocks  may  be  bought  just  when  a  reaction  is  setting  in. 
In  this  case,  it  is  frequently  wise  to  take  a  quick  loss  on 
the  theory  that  the  reaction  is  likely  to  be  5  or  6  points, 
and  that  the  stock  can  be  recovered  with  a  net  saving  of 


THE     ABC     OF     STOCK     SPECULATION.  49 

two  or  three  points.  A  stop  order  is  of  use  to  out-of-town 
customers,  because  sometimes  the  market  moves  a  good 
deal  before  a  broker  can  communicate  with  his  client  and 
get  an  order  to  act.  Stop  orders  are  often  valuable  on  the 
short  side  of  the  market,  because  a  scare  of  shorts  after 
considerable  decline  sometimes  brings  a  very  rapid  rise, 
which  runs  away  with  all  the  profits  that  have  accrued. 

Customers  who  give  stop  orders  should,  however,  under- 
stand exactly  what  they  mean.  A  customer  who,  being 
long  of  Union  Pacific  at  105,  should  give  an  order  to  stop 
at  103,  would  in  effect  be  saying  to  the  broker :  "Whenever 
Union  Pacific  sells  at  103,  sell  my  stock  immediately  at 
the  best  price  obtainable." 

If  the  best  price  obtainable  were  102  or  even  101,  the 
broker  would  still  be  within  his  rights  in  executing  the 
order.  Hence,  in  giving  stop  orders,  thought  should  be 
taken  as  to  the  size  of  the  market  in  the  stock.  In  Union 
Pacific,  for  instance,  a  stop  order  ought  to  be  executed 
within  %  or  14  pe^  cent,  of  the  stop  order  price,  except  in 
cases  of  panic,  but  a  stop  order  in  Lackawanna  or  Chicago 
&  Eastern  Illinois  or  in  some  industrial  stock  would  be 
very  dangerous,  because  no  approximate  idea  could  be 
formed  as  to  what  price  would  have  to  be  accepted. 

Stop  orders  should  not  be  given  in  any  case  in  stocks 
of  very  limited  market.  In  other  stocks,  their  value  will 
be  found  to  depend  largely  upon  the  methods  employed  by 
the  trader  himself. 


50  THE    ABC     or     STOCK     SPECULATION. 


CHAPTER  XI. 

*  Cutting  Losses  Short. 

We  have  spoken  in  previous  articles  of  methods  of  trad- 
ing. Experience  proves  that  every  operator  should  adopt 
one  of  two  methods:  Either  cut  losses  short,  or  take  an 
investment  position.  "We  propose  to  point  out  to-day  some 
of  the  advantages  of  cutting  losses  short. 

The  buyer  of  any  stock  has  some  reason  for  his  action. 
He  has  heard  that  the  stock  is  going  up;  he  believes  that 
it  is  selling  below  its  value,  he  sees  that  a  bull  market  is 
under  way  and  believes  that  this  stock  will  go  up  as  much 
as  any  other.    These  and  similar  reasons  lead  to  buying. 

It  is  obvious  that  in  all  but  one  of  these  cases  the  buyer 
does  not  profess  to  know  anything  definitely  about  the 
stock  he  buys.  He  acts  on  the  suggestions  or  advice  of 
others.  Points  are  good  when  they  are  good,  and  under 
some  conditions  can  very  wisely  be  followed.  There  is 
nothing  better  in  trading  than  to  know  that  a  great  opera- 
tor or  a  great  syndicate  intends  for  good  reasons  to  move 
the  price  of  a  stock  from  a  lower  to  a  higher  figure. 

But  almost  everybody  learns  by  sad  experience  that  the 
"best  laid  plans  of  mice  and  men  gang  aft  agley."  Great 
operators  change  their  minds  about  the  expediency  of  mar- 
ket movements  and  most  of  them  have  learned  that  it  is 
one  thing  to  will  and  another  to  do  in  stock  speculation. 

♦Dow's  Theory. 


THE     ABC     OF     STOCK     SPECULATION.  51 

Hence  the  trader  who  takes  a  point,  even  from  good 
sources,  has  only  partial  assurance  of  profitable  results. 

His  true  protection  in  such  a  case  lies  in  a  stop  order. 
If  the  price  advances,  well  and  good,  but  if  it  declines  his 
stop  order  cuts  his  loss  short,  while  those  who  do  not  stop 
the  loss,  but  who  listen  to  assurances  that  the  market  is 
all  right,  often  see  larger  losses  in  the  end. 

The  general  rule  is  to  stop  losses  within  a  range  of  two 
or  three  points  from  the  purchase  price.  All  purchases 
on  points,  tendencies  and  rumors  should  be  regarded  as 
guesses  and  protected  by  stop  orders.  Traders,  looking 
over  their  accounts,  seldom  lament  the  losses  of  $200, 
which  they  find  scattered  through  their  books  as  the  result 
of  stops,  but  they  deeply  lament  the  $1,500  or  the  $3,500 
losses  which  reflect  over-confidence  in  a  position  which 
proved  unsound. 

The  difficulty  with  stop  orders  is  that  they  are  fre- 
quently exercised  when  the  event  shows  that  the  loss  need 
not  have  been  taken.  There  is  no  help  for  this,  but  the 
placing  of  a  stop  order  can  be  wisely  varied  by  the  circum- 
stances of  a  given  case.  Suppose,  for  instance,  that  the 
5-year  movement  showed  a  bull  market  to  be  in  progress; 
that  there  has  come  in  this  advance  a  5 -point  reaction  in  a 
stock  like  Union  Pacific  and  that  a  purchase  had  been 
made  5  points  from  the  previous  highest. 

If  the  price  declined  2  points  more  in  such  a  case,  it 
would  probably  be  wise  to  exercise  the  stop  order  as  the 
fall  would  suggest  a  down  swing  of  larger  proportions  than 
had  been  anticipated.  It  might  be  such  a  move  as  occurred 
in  December,  1899,  when  stop  orders  proved  exceedingly 


^  THE    ABC     OF     STOCK     SPECULATION. 

profitable  in  bull  accounts.  If  the  price  subsequently  re- 
covered the  2  points,  and  the  stock  was  repurchased  at 
about  the  original  price,  it  would  probably  be  wise  to  put 
the  stop  order  the  next  time  about  3  points  away,  under  a 
belief  that  the  stock  would  not  go  quite  so  low  as  it  went 
before  and  that  the  stop  order  would  therefore  not  be  cxe-  > 
cuted. 

If  this  reasoning  proved  sound,  and  the  price  advanced, 
the  stop  order  could  wisely  be  kept  3  points  below  the 
market  price  until  the  stock  had  advanced  several  points, 
and  showed  signs  of  what  is  called  "toppiness."  Then  it 
might  be  well  to  advance  the  stop  order  to  2  points  and 
await  developments.  The  stop  order  is  of  primary  import- 
ance when  a  purchase  is  first  made  and  when  its  wisdom 
,  is  in  doubt.  It  is  also  of  primary  importance  in  pyramid- 
ing; that  is,  where  stock  is  being  bought  on  an  advancing 
market  every  point  up,  because  in  such  a  case  the  stop  order 
is  relied  upon  to  prevent  the  turning  of  a  profit  into  a  loss. 
It  is  of  importance  when  a  stock  has  had  its  normal  swing 
for  the  purpose  of  saving  most  of  the  profit  if  a  reaction 
comes,  while  leaving  a  chance  open  for  further  advance. 
It  is  of  least  importance  when  a  stock  has  been  well  bought 
and  is  slowly  advancing.  It  should  be  set  further  away 
from  the  market  at  such  a  time  than  any  other  so  as  to 
avoid  being  caught  on  the  small  setbacks  which  occur  in 
an  advancing  period. 

By  means  of  a  stop  order,  an  operator  can  trade  freely 
in  active  stocks  of  uncertain  value,  which  he  would  not 
venture  to  touch  as  an  investment.  By  it,  he  can  trade 
in  much  larger  amounts  than  he  could  otherwise  undertake 


THE     ABC     OF     STOCK     SPECULATION.  53 

to  protect.  The  stop  order  is  the  friend  of  the  active  specu- 
lator, who  wants  to  make  a  quick  dash  for  a  large  profit 
and  who  is  willing  to  make  small  losses  in  the  hope  of  get- 
ting a  good  run  once  in  four  or  five  attempts.  It  is  the 
friend  of  the  small  operator,  the  out-of-town  operator  and 
the  timid  operator.  It  should  he  applied,  however,  only 
in  active  stocks  where  there  is  a  large  market.  Stop  or- 
ders should  not  be  given  in  inactive  stocks,  as  the  seller 
may  be  slaughtered  in  their  execution. 

A  stop  order  to  sell  100  shares  of  Union  Pacific  at  -75 
means  that  the  stock  must  be  sold  at  the  best  price  obtain- 
able as  soon  as  there  has  been  a  transaction  at  75.  If  the 
best  price  were  74  or  73,  it  would  still  be  the  duty  of  the 
broker  to  sell.  Hence  the  importance  of  not  giving  such 
orders  in  stocks  where  wide  differences  in  quotations  may 
be  expected. 


54  THE    ABC     OF     STOCK    SPECULATION. 


CHAPTER  XII. 
*  The  Danger   in   Overtrading. 

A  frequent  inquiry  is :  "Can  I  trade  in  stocks  on  a  capi- 
tal of  $100,  buying  on  a  scale  up  and  stopping  my  loss  so 
as  to  protect  my  original  capital  ?" 

There  are  a  great  many  people  in  the  United  States  who 
think  about  trading  in  stocks  on  a  capital  of  $100  or  $200. 
Many  of  them  believe  that  if  a  thousand  dollars  is  a 
proper  10  per  cent,  margin  for  trading  in  100  shares,  $100 
must  be  a  fair  margin  for  trading  in  10  shares.  We  re- 
gard this  reasoning  as  sound,  but  dissent  from  the  con- 
clusion that  $1,000  justifies  trading  in  100  share  lots. 

The  reason  is  that  nobody  can  hope  to  buy  at  the  bottom 
or  to  sell  at  the  top ;  or  to  be  right  all  the  time  or  to  avoid 
losses.  Making  money  in  stocks  for  most  people  resolves 
itself  into  a  series  of  transactions  in  which  we  may  say 
there  are  six  profits  and  four  losses,  resulting  in  a  net 
gain.  The  experience  of  good  traders  shows  that  the  oper- 
ating expenses  in  trading,  that  is  to  say,  the  ratio  of  losses 
to  profits,  run  from  50  to  65  per  cent,  of  the  total  profits. 
'  A  man  who  may  have  made  $10,000  gross  in  trading  in 
a  specified  time  will  be  very  likely  to  have  lost  from  $5,000 
to  $6,0D0  gross  in  the  same  time,  leaving  a  net  profit  of 
from  $4,000  to  $5,000.  Profits  and  losses  run  in  streaks. 
There  will  be  times  of  all  profit  and  no  loss,  and  times  of 

*  Dow's  Theory. 


THE     ABC     OF     STOCK     SPECULATION.  55 

all  loss  and  no  profit.  But  the  average  even  for  those  who 
have  learned  to  trade  in  stocks  and  who  have  abundant 
capital  for  their  operations  works  out  less  than  half  of  the 
gross  profits  as  net  profits. 

What  chance  is  there  for  10  per  cent,  to  carry  a  specula- 
tor and  especially  a  beginner  through  the  losses  which  are 
almost  certain  to  come  before  he  can  accumulate  any  sub- 
stantial profit?  It  is  possible  to  say  that  if  an  operator 
had  done  this  or  that,  buying  at  the  right  time  and  selling 
at  the  right  time,  10  per  cent,  would  have  been  ample.  But, 
there  is  a  great  difference  between  seeing  what  might  have 
been  done  in  the  past  and  undertaking  to  do  something  for 
the  future. 

The  man  who  wishes  to  trade  in  stocks  and  who  has 
only  $100  to  lose,  should,  in  our  opinion,  adopt  one  of  two 
courses.  He  should  buy  outright  one  share  of  some  stock 
below  par  and  below  its  value  and  wait  until  the  advance 
in  that  stock  to  its  value  gives  him  a  profit  of  5  or  10 
per  cent,  as  the  case  may  be.  This  is  probably  the  surest 
way. 

The  other  way  is  to  buy  two  or  three  shares  on  margin, 
protecting  the  account  by  a  stop  order  at  about  two  points 
from  the  purchase  price.  Brokers  generally  are  not  anx- 
ious to  take  such  small  lots,  but  if  a  broker  believes  that 
a  customer  is  trading  on  right  lines,  and  is  likely  to  make 
money,  he  will  go  out  of  his  way  considerably  to  serve 
that  customer  under  a  belief  that  he  will  be  worth  some- 
thing in  the  future.  Nine  brokers  out  of  ten  would  say 
that  an  attempt  to  trade  in  stocks  on  a  capital  of  $100  was 
absurd.     But,  it  would  not  be  absurd  if  the  trading  basis 


56  THE     ABC     OP     STOCK    SPECULATION. 

were  made  two  shares,  as  that  would  give  the  trader  time 
in  which  to  recover  from  his  losses  as  well  as  some  confi- 
dence in  acting  at  the  proper  time  and  would  be  a  sort 
of  school  in  which  experience  could  be  gained. 

We  think  exactly  the  same  reasoning  holds  good  with 
regard  to  trading  in  100-share  lots  on  a  basis  of  $1,000. 
Brokers  accept  such  orders  readily  enough,  but  it  is  none 
the  less  over-trading,  and  none  the  less  likely  to  result  in 
the  loss  of  the  trader's  capital.  The  man  who  buys  100 
shares  on  a  10  per  cent,  margin  and  stops  his  loss  at  2 
per  cent,  has  lost  nearly  one-quarter  of  his  capital.  He 
tries  again  and  perhaps  makes  1  per  cent.  net.  His  third 
venture  results  in  a  loss  of  3  per  cent,  more  and  in  a  nearly 
total  loss  of  confidence,  leading  him  probably  to  sell  short 
just  when  he  ought  to  have  averaged,  thereby  completing 
the  sacrifice  of  his  money. 

If  the  same  man  with  a  capital  of  $1,000  had  begun 
with  10  shares  he  could  have  stood  his  loss;  he  would 
have  had  courage  to  average  or  to  buy  something  else  at  a 
low  point  and  would  very  likely  come  out  ahead. 

Almost  any  man  can  show  profits  in  stock  by  assuming 
that  he  would  do  so  and  so  at  various  conditions  of  the 
market.  He  succeeds  theoretically  in  this  way  because 
there  is  nothing  at  risk  and  his  judgment  is  clear.  The 
moment,  however,  that  he  has  a  risk  which  is  very  large 
in  proportion  to  his  capital,  he  consults  his  fears  instead 
of  his  judgment,  and  does  in  practice  exactly  opposite  what' 
he  would  have  done  had  his  transactions  been  purely 
academic. 

The  remedy  for  this  is  to  keep  transactions  down  to  a 


THE     ABC     OF     STOCK     SPECULATION.  57 

point,  as  compared  with  capital,  which  leaves  the  judg- 
ment clear  and  affords  ample  ability  to  cut  loss  after  loss 
short;  to  double  up;  to  take  hold  of  something  else,  and 
generally  to  act  easily  and  fearlessly  instead  of  under  the 
constraint  which  inevitably  comes  from  a  knowledge  that 
the  margin  of  safety  is  so  small  as  to  leave  no  room  for 
anything  except  a  few  anxious  gasps  before  the  account 
is  closed. 

If  people  with  either  large  or  small  capital  would  look 
upon  trading  in  stocks  as  an  attempt  to  get  12  per  cent, 
per  annum  on  their  money  instead  of  50  per  cent,  weekly, 
they  would  come  out  a  good  deal  better  in  the  long  run. 
Everybody  knows  this  in  its  application  to  his  private  busi- 
ness, but  the  man  who  is  prudent  and  careful  in  carrying 
on  a  store,  a  factory  or  a  real  estate  business  seems  to  think 
that  totally  different  methods  should  be  employed  in  deal- 
ing in  stocks.    Nothing  is  further  from  the  truth. 


58  THE     ABC     OF     STOCK     SPECULATION. 


CHAPTEE  XIII. 
*  Methods  of  Trading. 

A  correspondent  inquires:  "How  can  a  man  living  at  a 
distance  from  Wall  Street  hope  to  follow  the  market  close- 
ly enough  to  make  any  money  trading  in  stocks  ?" 

This  question  comes  to  us  in  different  forms  frequently, 
and  shows  misapprehensions  as  to  what  is  involved  in  suc- 
cessful trading.  Many  people  seem  to  think  that  if  an 
operator  is  in  Wall  Street,  he  can  tell  what  the  market  is 
going  to  do.  Nothing  is  further  from  the  fact.  The  more 
a  man  really  knows  ahout  speculation,  the  less  certain  he 
becomes  in  regard  to  any  market  movement,  except  as  the 
result  of  general  conditions. 

The  distinction  to  be  made  between  trading  in  the 
Street  and  trading  from  out  of  town  is  clear  in  one  point. 
The  operator  who  watches  the  ticker  or  blackboard  can 
turn  at  very  short  notice,  but  the  ability  to  turn  quickly 
often  proves  a  great  disadvantage,  because  it  leads  to  many 
turns  at  the  wrong  time. 

The  out  of  town  speculator  should  not  attempt  to  make 
quick  turns,  unless  by  private  wire  connections  he  is  able 
to  watch  the  market  as  a  matter  of  business.  The  out  of 
town  operator  should  trade  on  broad  lines  and  from  an 
investment  standpoint.    He  should  deal  not  in  stocks  that 

*Dow's  Theory. 


THE     ABC     OF     STOCK     SPECULATlUX.  59 

happen  to  be  active,  and  not  on  points  but  almost  wliolly 
on  well  considered  convictions  as  to  the  probable  course 
of  the  general  market  and  the  relative  position  of  price  to 
value  of  the  special  stocks  in  which  he  proposes  to  deal. 

The  first  question  to  consider  is  what  constitutes  a  spec- 
ulative investment.  We  should  say  it  meant  in  most  cases 
a  railway  stock  paying  regular  dividends,  publishing  earn- 
ings gross  and  net,  at  regular  intervals  and  giving  full 
particulars  of  its  financial  and  physical  condition  as  often 
at  least  as  once  a  year.    If  of tener,  so  much  the  better. 

It  is  possible  to  derive  fairly  accurate  knowledge  of  the 
value  of  such  a  stock.  It  should  be  considered  essentially 
with  reference  to  its  ability  to  maintain  or  increase  its 
dividends.  If  the  stock  seems  likely  to  continue  a  current 
rate  of  dividend,  and  the  return  on  the  cost  is  such  as  to 
make  it  fairly  satisfactory  as  an  investment,  it  is  a  good 
stock  to  buy  when,  in  sympathy  with  decline  in  the  general 
market,  it  has  fallen  below  its  normal  price. 

Take,  for  instance.  Union  Pacific  common.  A  few 
months  ago  this  stock  was  selling  between  50  and  60,  It 
was  paying  4  per  cent,  dividends,  and  the  company  was 
known  to  be  earning  over  8  per  cent.  Here  was  the  case 
of  a  stock  obviously  selling  below  its  value.  It  has  since 
risen  more  than  30  points.  There  were  other  stocks,  per- 
haps not  as  cheap  in  point  of  value,  but  of  which,  much 
that  was  favorable  could  be  said.  Three  months  ago  the 
values  of  railway  stocks  generally  were  above  their  prices. 

Now,  this  can  be  said  of  very  few  stocks,  and  this  fact 
ought  to  make  an  outsider  slow  to  buy.  The  chances  are 
that  there  will  come,  as  there  seems  to  be  coming,  declines 


60  THE    ABC     OF     STOCK     SPECULATION. 

which  will  carry  prices  back  to  a  level  where  it  will  again 
be  prudent  to  buy.  Suppose  that  time  to  arrive.  The  wise 
course  for  an  outsider  will  be  to  buy  of  a  good  railroad 
stock,  an  amount  he  can  easily  purchase  outright,  and 
which  he  would  be  willing  to  hold  as  an  investment  in  case 
the  price  should  decline.  Should  it  then  decline  consid- 
erably it  would  probably  be  prudent  for  him  to  buy  more, 
lowering  his  average,  but  only  after  careful  revision  of  the 
facts  bearing  upon  the  value  and  upon  the  general  market. 

This  stock  should  be  held  without  regard  to  current 
fluctuations,  until  it  showed  a  satisfactory  profit.  Then 
it  should-  be  sold  and  the  operator  should  wait  weeks  or 
months  if  necessary  for  an  opportunity  to  take  it  or  some 
other  stock  back  upon  favorable  terms. 

The  outsider  who  tries  to  follow  the  market  from  day 
to  day,  is  not  likely  to  have  very  marked  success.  The 
operator  who  selects  investment  properties  carefully  and 
buys  after  the  market  has  had  general  declines,  and  who 
exercises  a  good  deal  of  patience  both  in  waiting  for  the 
time  to  buy  and  for  the  time  to  sell — who,  in  short,  treats 
his  speculation  as  an  investment,  will  be  likely  to  make 
money  in  stocks  as  a  rule. 


A  correspondent  writes:  "Is  there  any  way  by  which 
an  outsider  who  cannot  watch  fluctuations  of  the  market 
hourly  can  trade  in  stocks  with  a  fair  chance  of  making 
money  ?" 

We  think  there  are  two  methods  by  either  of  which  an 
outsider  has  a  fair  speculative  chance.    The  first  is  to  buy 


THE     ABC     OF     STOCK    SPECULATION.  Gl 

stocks  for  investment;  that  is,  to  pay  for  tliem  outright 
when  they  are  selling  below  value  and  wait  until  they  are 
up  to  value,  getting  the  difference  for  a  profit. 

Value  is  determined  by  the  margin  of  safety  over  divi- 
dends, the  size  and  tendency  of  earnings;  the  soundness 
of  the  balance  sheet  and  of  operating  methods,  and  gen- 
eral prospects  for  the  future.  This  sounds  rather  compli- 
cated, but  is  not  especially  difficult  to  work  out. 

For  instance,  a  year  ago  we  almost  daily  pointed  out 
that  earnings  had  greatly  increased  during  the  year  past; 
that  fixed  charges  had  not  increased,  hence  that  the  actual 
value  of  stocks  had  advanced  while  prices  had  in  most 
cases  declined.  It  was  obvious  that  this  could  not  last; 
that  net  earnings  must  decrease  or  prices  advance.  There 
were  then  many  stocks  cheap  on  their  earnings  and  this 
was  easily  a  matter  of  demonstration. 

In  the  sflme  sense  it  can  now  (1902)  be  said  that  most 
stocks  are  dear  on  their  earnings.  It  is  true  that  earnings 
have  increased  somewhat  over  last  year,  but  prices  of  many 
stocks  have  advanced  from  50  to  103  per  cent.,  and  in  v/hat- 
ever  form  the  yardstick  is  applied  the  result  is  unfavor- 
able to  value  as  compared  with  prices  in  a  large  number 
of  the  active  stocks. 

When  a  stock  sells  at  a  price  which  returns  only  about 
3^  per  cent,  on  the  investment,  it  is  obviously  dear,  except 
there  be  some  special  reason  for  the  established  price.  In 
the  long  run,  the  prices  of  stocks  adjust  themselves  to  the 
return  on  the  investment  and  while  this  is  not  a  safe  guide 
at  all  times  it  is  a  guide  that  should  never  be  laid  aside 
or  overlooked.    The  tendency  of  prices  over  a  considerable 


62  THE     ABC     OF     STOCK     SPECULATIOX. 

length  of  time  will  always  be  toward  values.  Therefore, 
the  outsider  who  by  studying  earning  conditions  can  ap- 
proach a  fairly  correct  idea  of  value  has  a  guide  for  his 
investments  which  will,  as  a  whole,  be  found  safe. 

Most  people,  however,  when  they  talk  about  making 
money  in  stocks  do  not  mean  the  slow  road  through  in- 
vestments but  the  short  cut  by  way  of  speculation.  We 
think  here  again  there  is  one  rule  worth  all  others  on  this 
subject.  It  is  a  rule  which  is  carried  out  with  greater  or 
less  precision  by  a  majority  of  successful  traders.  It  has 
been  approved  by  the  great  masters  of  speculation  and  it 
is  indorsed  by  the  practical  experience  of  almost  every- 
body who  has  dealt  at  all  freely  in  stocks. 

This  rule  is  to  cut  losses  short  but  let  profits  run.  It 
sounds  very  easy  to  follow,  but  is  in  reality  difficult  to  ob- 
serve. The  difficulty  arises  from  the  unwillingness  of  an 
operator  to  take  a  small  loss  when  experience -shows  him 
that  in  many  cases  such  a  loss  need  not  have  been  taken. 
Furthermore,  the  practice  of  this  rule  suggests  that  hav- 
ing, for  instance,  bought  a  stock  and  taken  a  loss,  the 
stock  should  be  bought  again,  and  this  may  have  to  be 
done  three  or  four  times  before  an  advance  finally  comes. 
These  three  or  four  losses  prove  very  burdensome  and  lead 
]oeople  oftentimes  to  decide  not  to  cut  the  loss  short  and 
that  is  generally  when  a  large  loss  ensues. 

The  question  will  of  course  be  asked  whether  there 
should  be  a  uniform  stop  loss,  or  whether  it  should  vary 
with  varying  conditions.  Experience  indicates  that  two 
points  is  the  wisest  place  to  stop  a  loss.  If  a  stock  goes 
two  points  against  the  buyer,  it  is  very  liable  to  go  more. 


THE     ABC     OF     STOCK     SPECULATION.  63 

and  it  suggests  that  the  expected  move  has  either  been 
delayed  or  is  not  coming. 

Suppose,  for  instance,  that  an  operator  believes  from 
information,  study  of  values,  experience  in  markets  and 
the  tendency  of  the  period,  that  Union  Pacific  ought  to  bo 
l)ought  at  107.  If  he  buys  at  that  price  and  the  stock 
falls  to  105,  theoretically  he  should  cut  his  loss,  buying  it 
again  when  the  indications  arc  again  favorable. 

Extended  records  of  trading  show  that  this  policy, 
blindly  followed,  with  blind  following  also  of  the  plan  of 
letting  profits  run,  would  give  better  results  than  most 
people  are  able  to  obtain  by  the  exercise  of  judgment.  At 
the  same  time,  judgment  can  sometimes  be  wisely  em- 
ployed in  cutting  a  loss. 

It  is  not,  for  instance,  necessary  in  all  cases  to  take  a 
loss  because  the  price  is  suddenly  jammed  down  2  points. 
If  the  market  shows  a  tendency  to  rally,  wait  a  little.  If 
a  decline  in  the  stock  bought  is  obviously  due  to  a  collapse 
in  some  other  stock,  and  that  collapse  seems  to  have  spent 
its  force,  it  would  be  unnecessary  to  execute  the  stop.  The 
idea  is  to  stop  the  loss  when  the  market  has  legitimately 
declined  to  that  extent. 

In  letting  profits  run  there  are  two  Avays  of  determining 
when  to  close.  One  is  to  wait  until  the  general  market 
shows  a  decided  change  of  temper.  The  other  is  to  keep 
a  stop  order  about  3  points  behind  the  high  prices  on  the 
advance  and  close  on  that  stop.  Here,  again,  experience 
has  shown  that  when  a  stock  starts  on  a  manipulated  ad- 
vance, it  is  seldom  allowed  to  react  as  much  as  3  points 
until  the  move  is  completed.     If  it  reacts  3  points,  it  may 


64  THE     ABC     OF     STOCK     SPECULATION. 

mean  trouble  with  the  deal,  although  there  are  cases 
where  such  reactions  are  allowed  for  the  purpose  of  shak- 
ing out  following.  Here,  again,  something  can  be  left  to 
judgment. 

But  the  great  thing  is  having  bought  a  stock  and  having 
got  fairly  away  from  the  purchase  price,  not  to  be  in  too 
great  a  hurry  about  selling,  provided  that  the  general 
market  is  bullish.  "In  a  bear  market,  the  whole  proceeding 
ought  to  be  reversed,  the  operator  taking  the  short  side 
instead  of  the  long,  but  in  other  respects  applying  the 
same  rule. 

We  do  not  wish  to  be  understood  as  saying  that  there 
is  any  sure  way  of  making  money  in  stocks,  but  the  prin- 
ciple of  buying  after  a  period  of  steadiness  in  prices,  stop- 
ping losses  and  letting  profits  run  will,  as  a  matter  of  sta- 
tistical record,  beat  most  people's  guessing  at  what  is 
going  to  occur. 


THE     ABC     OF     STOCK     SPECULATION.  65 


CHAPTEE  XIV. 
*  The  Out  of  Town  Trader. 

A  correspondent  asks:  "How  can  a  man  living  at  an 
interior  city,  where  he  sees  quotations  only  once  or  twice 
a  day,  make  money  by  trading  in  stocks?" 

This  question  touches  a  point  which  seems  to  find  wide- 
spread acceptance,  namely,  that  proximity  to  Wall  Street 
is  a  special  advantage  in  trading.  It  certainly  is  for  some 
kinds  of  trading.  If  a  man  owns  a  seat  on  the  Stock  Ex- 
change and  pays  no  commissions,  he  can  probably  do  best 
by  operating  for  his  own  account  on  the  floor  of  the  ex- 
change, although  not  every  man  with  these  facilities  is 
able  to  make  his  profits  exceed  his  losses. 

For  practical  purposes,  it  may  be  said  that  most  traders 
in  or  out  of  Wall  Street  are  handicapped  by  the  commis- 
sion of  $25  for  buying  and  selling  100  shares  of  stock. 
There  probably  are  some  evasions  of  the  commission  rule, 
but  as  far  as  individual  operators  are  concerned  commis- 
sions are  not  much  evaded. 

A  commission  of  $12.50  for  buying  and  as  much  more 
for  selling  100  shares  of  stock  is  insignificant  if  there  are 
ten  or  even  five  points  difference  between  the  buying  and 
selling  price.  But  the  commission  is  serious  if  the  differ- 
ence between  the  buying  and  the  selling  price  is  only  one 
point.    A  man  who  started  in  to  trade  for  one  point  profit 

*Dow's  Theory. 


66  THE     ABC     OF     STOCK     SPECULATION. 

and  pays  ^  commission  would  inevitably  give  all  his 
money  to  his  broker  in  the  course  of  time. 

The  ordinary  operator  must  always  endeavor  to  get  com- 
paratively large  profits.  He  should  not  buy  unless  he 
feels  warranted  in  believing  that  the  stock  which  he  se- 
lects will  go  up  four  or  five  points,  so  that  when  he  makes 
he  will  get  double  his  loss  when  he  loses.  In  trading  for 
five  or  ten  point  turns,  the  operator  at  an  interior  city  has 
one  advantage.  He  does  not  hear  the  rumors  and  see  sud- 
den movements  in  prices  which  are  the  bane  of  the  office 
trader. 

Wall  Street  is  often  full  of  people  to-day  who  have  been 
long  of  the  market  for  a  month,  but  who  have  ma'de  little 
or  no  money,  because  they  have  been  scared  out  by  rumors 
and  by  small  relapses.  The  man  who  does  not  see  the  mar- 
ket escapes  this.  The  greatest  advantage  resting  upon  the 
out  of  town  operator  is  the  fact  that  sometimes  the  market 
will  change  its  character  so  rapidly  as  to  convert  a  profit 
into  a  loss  or  establish  a  loss  larger  than  he  intended  to 
take  before  he  knows  it.  This,  however,  does  not  occur  as 
frequently  as  most  people  seem  to  suppose. 

It  is  rather  exceptional  for  the  market,  having  run  sev- 
eral points  in  one  direction,  to  reverse  the  movement  sud- 
denly and  without  considerable  fluctuations  near  the  turn- 
ing points.  Such  cases  do  occur,  but  they  are  unusual. 
After  a  5-point  rise,  a  stock  usually  has  a  period  during 
which  fluctuations  are  narrow  and  which  are  maintained 
long  enough  to  give  the  out-of-town  trader  plenty  of  time 
to  get  out  if  he  dislikes  the  appearance  of  the  trading. 
Stop  orders  are  the  special  protection  of  the  out-of-town 


THE     ABC     OF     STOCK     SPECULATION.  67 

trader,  who,  if  he  will  stick  to  stable  stocks,  can  almost 
always  cut  his  loss  or  save  his  profit  at  any  spot  where  he 
deems  wise. 

"The  out-of-town  trader  wants  to  begin  his  campaign 
with  a  conviction  that  the  stock  which  he  buys  is  selling 
below  its  value.  This  should  not  only  be  a  conviction,  but 
a  demonstrated  conviction,  which  cannot  be  shaken  if,  at 
the  outset,  the  price  declines  instead  of  advances.  Having 
determined  on  his  stock  from  the  viewpoint  of  value,  he 
should,  if  possible,  wait  about  buying  until  the  general 
market  has  had  its  normal  setback  from  a  high  point. 

If  twenty  active  stocks  have  advanced  10  points,  a  nor- 
mal setback  would  be  four  points,  and  then,  in  an  ex- 
tended period  of  rising  prices,  would  be  the  time  to  make 
the  initial  purchase.  The  operator  should  then  take  in  a 
great  stock  of  patience.  He  will  see  other  stocks  go  up 
and  his  stock  stand  still.  He  will  see  and  hear  daily  that 
something  else  is  making  riches  for  traders,  but  he  must  \ 
shut  his  ears  to  these  statements,  even  if  they  are  right 
as  far  as  fluctuations  go.  He  must  just  sit  on  his  stock, 
which  is  intrinsically  below  its  value,  until  the  other  peo- 
ple observe  that  it  is  selling  too  low  and  begin  to  buy  it 
or  manipulate  it. 

The  tendency  with  most  people  holding  a  stock  which 
does  not  move  for  a  time  is  to  sell  the  stock  about  as  soon 
as  it  begins  to  move,  through  fear  that  it  will  again  be- 
come dull.  This  is  just  the  time  not  to  sell,  but,  if  any- 
thing, to  buy  more  on  the  idea  that  other  people  have  dis- 
covered that  the  price  is  below  value.  After  the  price  has 
moved  up  two  or  three  points,  it  is  well  to  put  in  a  stop 


68  THE     ABC     OF     STOCK     SPECULATION. 

order  perhaps  two  points  back  from  the  top  and  follow  the 
rise  in  the  stock  with  the  stop  order  disregarding  current 
reports  and  waiting  until  the  price  is  either  up  to  the  value 
or  until  market  conditions  make  taking  a  profit  judicious, 
provided  always  that  a  sudden  setback  does  not  close  out 
the  transaction. 

An  out-of-town  oj)crator  can  do  all  this  just  as  well  aa 
an  office  trader  and  in  some  respects  better.  Some  of  the 
large  operators  like  to  go  away  from  the  market  and  work 
from  Newport  or  Saratoga  or  other  distant  points  in  order 
to  look  at  the  trading  with  an  unbiased  mind  and  without 
being  unsettled  by  the  rumors  that  always  grow  out  of  any 
special  move.  The  outsider  who  will  wisely  study  values 
and  market  conditions  and  then  exercise  patience  enough 
for  six  men  will  be  likely  to  make  money  in  stocks. 


THE    ABC     OF     STOCK     SPECULATION".  69 


CHAPTER  XV. 

*  The  Short  Side  of  the  Market. 

A  correspondent  writes:  "You  demonstrate  that  an 
operator  in  stocks  ought  to  work  on  the  short  side  of  the 
market  during  about  half  of  almost  every  decade.  I  feel 
some  hesitation  about  selling  property  which  I  do  not  own. 
Will  you  not  make  it  clear  how  the  short  side  of  the  mar- 
ket is  normal  trading?" 

It  is  quite  true  that  in  each  of  the  past  four  decades  it 
would  have  been  wise  to  have  worked  on  the  short  side  at 
least  half  of  the  time.  It  is  also  true  that  the  public  as  a 
whole  does  not  like  short  selling.  It  is  true  that  corners 
occur  at  long  intervals  and  are  destructive  to  those  caught 
therein.  But  they  occur  so  seldom  as  to  make  them  a  very 
remote  danger.    There  is  about  one  in  ten  years. 

We  have  explained  the  principle  of  short  selling  many 
times,  but  will  state  the  process  once  more.  A  customer 
X  directs  Broker  A  to  sell  short  100  shares  of  Union  Pa- 
cific at  par.  Broker  B  buys  it.  A,  not  having  the 
stock  goes  to  Broker  C,  and  borrows  from  him  100  shares 
of  Union  Pacific,  giving  as  security  $10,000  in  cash.  This 
stock  is  then  delivered  by  A  to  B,  who  pays  A  $10,000 
therefor.  Matters  then  rest  until  Union  Pacific  advances 
or  declines  enough  to  make  X  wish  to  close  his  account. 
He  then  directs  A  to  buy  Union  Pacific,  say  at  95,  and  A 

♦  Dow's  Theory. 


70  THE    ABC     OF     STOCK     SPECULATION. 

gets  the  stock  from  Broker  D.  The  stock  thus  obtained  is 
delivered  to  C,  who  thereupon  returns  the  money  which  he 
has  had  as  security  and  $9,500  of  the  amount  goes  to  D, 
leaving  $500,  less  expenses,  as  the  profit  of  X  on  the 
transaction. 

While  X  is  waiting  to  see  what  the  market  is  going  to 
do  C  has  the  use  of  A's  $10,000,  and  under  ordinary  con- 
ditions, pays  interest  on  this  money.  This  interest  is 
called  the  loaning  rate  on  stocks  and  is  usually  a  little 
below  the  current  rate  for  loans  on  collateral. 

The  lower  these  rates  are,  compared  with  the  rate  for 
\  money,  the  more  demand  there  is  to  borrow  that  particular 
I  stock,  and  the  loaning  rate  is  the  point  to  be  watched  by 
1  those  who  may  be  short,  to  see  whether  the  short  interest  is 
/  large  or  small. 

In  case  the  demand  to  borrow  a  certain  stock  is  very 
large,  the  loaning  rate  will  be  quoted  flat,  which  means  in 
the  case  cited  that  C  would  get  the  use  of  A's  $10,000 
Avithout  paying  any  interest.  If  the  demand  for  the  stock 
should  be  still  greater,  A  might  have  not  only  to  give  C 
the  $10,000  without  interest,  but  pay  C  a  small  premium 

I  in  addition.  When  the  loaning  rate  of  a  stock  is  quoted 
at  1-33  it  means  that  C  gets  his  $10,000  from  A,  without 
interest,  and  in  addition  a  premium  of  $3.12  a  day  for 
each  100  shares^  which  has  to  be  paid  by  X,  who  must  also 
pay  all  dividends  that  may  be  declared  on  the  stock. 

In  ordinary  lines  of  business,  selling  short  with  the  idea 
of  borrowing  for  delivery  would  be  impossible.  In  the 
stock  market  it  is  impracticable  to  sell  distributed  bonds 
or  investment  stocks  short  because  such  securities  are  held 


THE     ABC     OF     STOCK     SPECULATION.  71 

by  investors,  and  are  not  carried  in  quantity  by  brokers, 
hence,  could  not  be  readily  borrowed.  But,  in  active 
stocks,  there  is  no  difhculty  whatever  in  borrowing. 

The  reason  is  this:  Every  broker  who  carries  many 
stocks  employs  a  great  deal  more  money  than  he  possesses. 
In  theory,  a  broker  carrying  for  a  customer  109  shares  of 
Union  Pacific  at  par  would  make  up  the  money  for  the 
purchase-by  using  $1,000  belonging  to  the  customer,  $1,000 
of  the  money  of  the  brokerage  firm,  and  then  borrow  $8,000 
from  a  bank  on  the  security  of  the  100  shares  of  stock 
purchased. 

An  active  broker,  consequently,  is  always  a  large  bor- 
rower of  money,  and  when  he  borrows  from  a  bank  he  is 
expected  to  put  up  20  per  cent,  margin  on  his  loan.  But 
if  he  can  lend  stocks  he  gets  the  full  value  of  the  stock 
and  does  not  have  to  put  up  any  of  his  own  money  or  of 
his  customer's  money.  Hence,  every  broker  is  willing  to 
lend  stocks,  particularly  when  the  demand  for  stock  is 
sufficient  to  make  the  rate  of  interest  lower  than  the  mar- 
ket rate,  as  the  broker  in  this  case  makes  a  profit  by  charg- 
ing his  customer  who  is  long  5  or  6  per  cent,  interest,  while 
he  perhaps  secures  his  money  without  any  cost  through 
lending  the  stock  flat. 

This,  from  the  standpoint  of  the  short  seller,  is  what 
makes  his  operation  practically  safe.  Ordinarily,  it  is  just 
as  easy  to  borrow  active  stocks  as  it  is  to  borrow  money, 
and  squeezes  of  shorts  through  inability  to  borrow  are  little 
if  any  more  frequent  than  squeezes  of  "longs"  through  the 
difficulty  of  brokers  in  borrowing  money. 

Squeezes  of  shorts  sometimes  develop  themselves  and 


72  THE     ABC     OF     STOCK     SPECULATION. 

are  sometimes  manipulated.  When  friends  of  a  property 
see  a  large  short  interest  they  sometimes  try  to  persuade 
holders  of  the  stock  to  agree  not  to  lend  it  for  a  day  or 
two  and  thus  scare  shorts  to  cover  by  difficulty  in  borrow- 
ing. If  this  undertaking  is  successful  brokers  are  notified 
to  return  borrowed  stock,  and  when  they  try  to  borrow 
elsewhere  they  find  little  offering.  The  loaning  rate  pos- 
sibly runs  up  to  ^  per  cent,  a  day,  or  perhaps  higher. 

Shorts  are  alarmed  and  cover,  advancing  the  price  of 
the  stock  and  enabling  holders  to  sell  at  a  profit.  Such  a 
squeeze  usually  lasts  only  two  or  three  days,  as  by  that 
time  the  advanced  price  leads  those  who  have  the  stock 
to  either  sell  it  or  lend  it,  and  the  price  then  usually  goes 
lower  than  before.  Sometimes  there  is  a  short  interest  so 
large  and  so  persistent  as  to  keep  a  stock  lending  at  a 
premium  for  some  time.  This  is  usually  almost  certain 
evidence  of  decline,  but  the  expenses  of  premiums  and 
the  necessity  of  paying  dividends  sometimes  eat  up  the 
profits  so  that  but  little  remains  even  after  considerable 
fall  in  price.  Mr.  Gould  is  said  to  have  once  remained 
short  of  New  York  Central  over  four  years,  and  to  have 
had  a  large  profit  as  between  his  buying  and  his  selling 
price,  but  to  have  had  the  greater  part  of  it  eaten  up  in 
dividends. 

In  picking  out  a  stock  to  sell  short,  the  first  considera- 
tion ought  to  be  that  the  price  is  above  value,  and  that 
future  value  appears  to  be  shrinking.  It  should  be  an 
active  stock  and,  if  possible,  a  stock  of  large  capital.  It 
should  be  an  old  stock  by  preference,  which  means  having 
wide  distribution  instead  of  concentrated  ownership.     By 


THE     ABC     OF    STOCK    SPECULATION.  73 

preference  it  should  be  a  high  priced  stock  with  a  reason- 
able probability  that  dividends  will  be  reduced  or  passed. 
Such  a  stock  should  be  sold  on  advances  and  bought 
in  on  moderate  declines,  say  4  or  5  points,  as  long  as| 
the  market  seems  to  be  reasonably  steady.  But,  if  the 
market  becomes  distinctly  weak,  only  part  of  the  short 
stock  should  be  bought  in  with  the  hope  that  some  short 
interest  may  be  established  at  a  price  so  high  as  to  be 
out  of  reach  of  temporary  swings.  The  best  profits  in 
the  stock  market  are  made  by  people  who  get  long  or  short 
at  extremes  and  stay  for  months  or  years  before  they  take 
their  profit. 


74  THE     ABC     OF     STOCK     SPECULATIOlSr. 

CHAPTEK  XVI. 

*  Speculation  for  the  Decline. 

The  question  is  frequently  asked  whether  in  taking  a 
bearish  view  of  the  general  market  it  is  expected  that  all 
stocks  will  go  down  together  or  that  some  will  fall  and 
others  not. 

The  answer  to  this  question  takes  two  forms — the  first 

lis  the   speculative   movement;   the   second   the   effect   of 

lvalues.     When  the  market  goes  down,  especially  if  the 

/  decline  is  violent  or  continued,  all  stocks  fall ;  not  per- 

I  haps  equally,  but  enough  to  be  regarded  as  participating 

/  fully  in  a  general  decline.     Indeed,  it  often  happens  that 

a  stock  of  admitted  large  value  will  fall  more  in  a  panic 

than  a  stock  of  little  value. 

V  The  reason  is  that  when  people  have  been  carrying 
various  stocks,  some  good  and  some  bad,  and  a  time  comes 
when  they  are  obliged  to  suddenly  furnish  additional  mar- 
gin or  reduce  their  commitments,  they  try  to  sell  the 
stocks  for  which  they  think  the  market  will  be  best,  name- 
ly, their  best  stocks.  But  the  very  merit  of  such  stocks 
prevents  the  existence  of  a  short  interest,  hence  when 
j  considerable  amounts  are  offered  in  a  panic  there  is  no 
I  demand  for  covering  purposes,  and,  in  fact,  no  demand 
except  from  investors  who  may  not  know  of  the  decline  or 
who  may  not  have  money  for  investment  at  that  particular 
moment.      Consequently   the   good   stock    drops   until   it 

*Dow's  Theory. 


THE     ABC     OF     STOCK     SPECULATION.  75 

meets  an  investment  demand  somewhere.  This  condition 
was  illustrated  by  the  action  of  Delaware  &  Hudson  in  the 
panic  of  May  9,  1901.  It  had  nearly,  if  not  quite,  the 
largest  decline  of  any  stock  on  the  list,  falling  in  half  an 
hour  from  160  to  105,  chiefly  because  people  generally  did 
not  know  the  price  at  which  stock  was  being  offered. 

It  may  be  accepted,  therefore,  that  in  a  general  decline  [ 
merit  in  a  stock  will  not  count  for  the  time  being.  Good 
and  bad  will  decline  measurably  alike.  But  here  comes  in 
a  marked  distinction.  When  the  recovery  comes,  a  day  or 
a  week  later,  the  good  stock  will  recover  more  and  hold  its 
recovery  better  than  the  poor  stock.  Delaware  &  Hudson 
is  again  a  good  illustration.  After  the  quotation  of  105 
was  printed  on  May  9  orders  to  buy  the  stock  came  from 
all  sections,  and  in  another  hour  the  prica  was  in  the 
neighborhood  of  150. 

Value  will  always  work  out  in  the  course  of  time.  A 
stock  intrinsically  cheap  and  a  stock  intrinsically  dear 
may  be  selling  at  the  same  price  at  a  given  time.  As  the 
result  of  six  months'  trading  they  may  have  presented  the 
appearance  of  moving  together  in  most  of  the  fluctuations, 
but  at  the  end  of  the  period  the  good  stock  will  be  10 
points  higher  than  the  poor  one,  the  difference  represent- 
ing a  little  smaller  decline  and  a  little  better  rally  in  each 
of  five  or  six  swings. 

This  exactly  describes  what  will  occur  all  through  the 
market  during  the  next  bear  period,  whenever  that  period 
comes.  There  will  be  a  sifting  of  the  better  from  the 
worse,  visible  enough  at  a  distance,  but  not  conspicuous 
at  any  particular  stage  in  the  process. 


76  THE     ABC     OF     STOCK    SPECULATION". 

Where  there  is  a  great  change  in  the  value  of  a  stock 
it  will  advance  in  a  bear  period.  The  market  as  a  whole 
declined  from  1881  to  1885,  but  in  that  period  Manhat- 
tan, while  participating  in  most  of  the  market  swings, 
went  from  the  neighborhood  of  39  to  the  neighborhood 
of  par.  because  the  increased  earnings  of  the  company 
increased  value  steadily  and  largely  during  that  time. 

The  practical  lesson  is  that  a  stock  operator  should  not 
deal  in  stocks  unless  he  thinks  he  knows  their  value,  nor 
unless  he  can  watch  conditions  so  as  to  recognize  changes 
in  value  as  they  come  along.  He  should  then  have  at 
leart  a  conviction  as  to  what  stocks  are  above  their  value 
and  what  are  below  their  value  at  a  given  time.  If  the 
main  tendency  of  the  market  is  downward,  he  should  sell 
stocks  which  he  believes  to  be  above  their  value  when  they 
are  very  strong,  taking  them  in  on  the  next  general  de- 
cline. In  buying  for  a  rally,  he  should  invariably  take 
the  stocks  that  are  below  their  value,  selling  them  also 
when  a  moderate  profit  is  shown. 

When  the  market  appears  in  a  doubtful  position  it  is 
sometimes  wise  to  sell  short  a  stock  that  is  conspicuously 
above  its  value  and  buy  a  stock  which  is  conspicuously 
below  its  value,  believing  that  one  will  protect  the  other 
until  the  position  of  the  general  market  becomes  clear. 
It  was  formerly  very  popular  for  traders  to  be  long  of 
Northwest  and  short  of  St.  Paul,  usually  with  good  re- 
sults. 

During  the  past  year  (1901-2)  there  have  been  operators 
who  have  aimed  to  be  long  of  j\Ianhattan  and  short  of 
either  Metropolitan  or  Brooklyn  on  the  same  line  of  rea- 


THE     ABC     OF     STOCK     SPECULATION,  77 

son.  The  general  method  of  operating  such  an  account 
is  to  trade  for  the  difference;  that  is,  supposing  a  transac- 
tion to  have  been  started  with  the  two  stocks  10  points 
apart — the  account  is  closed  when  they  are,  say,  15  points 
apart,  assuring  5  points  net  profit.  It  is  all,  however,  a 
part  of  the  same  general  law.  Stocks  fluctuate  together, 
but  prices  are  controlled  by  values  in  the  long  run. 


78  THE    ABC     OF     STOCK     SPECULATION. 

CHAPTEE  XVII. 
*  Concerning  Discretionary  Accounts. 

A  correspondent  writes:  "I  inclose  herewith  a  circular 
in  which  the  sender  asks  me  to  give  him  a  discretionary 
account  promising  large  returns  and  claiming  great  suc- 
cess in  past  operations.  A  man  in  the  market  ought  to 
be  able  to  do  better  for  me  than  I  could  do  for  myself  at 
a  distance.  Is  this  party  reliable,  and  do  you  consider 
his  scheme  safe  ?" 

We  get  this  letter  in  some  form  very  often  and  have 
answered  it  many  times,  but  it  is  difficult  to  make  people 
see  the  truth.  Outsiders  want  to  make  money  and  they 
believe  that  people  in  Wall  Street  know  what  the  market 
is  going  to  do,  hence  that  the  only  question  involved  in 
discretionary  accounts  is  the  honesty  of  the  men  who  run 
them. 

The  fact  is  that  people  in  Wall  Street,  even  those  who 
get  very  near  the  center  of  large  operations,  do  not  know 
what  the  market  is  going  to  do  with  any  regularity  or  cer- 
tainty. The  more  they  actually  know,  the  less  confident 
they  become,  and  the  large  operators  who  try  to  make 
markets  are,  in  most  cases,  the  least  confident  of  anybody 
because  they  know  so  well  the  variety  and  extent  of  the 
difficulties  which  may  be  encountered. 

People  who  trade  in  stocks  can  set  down  as  a  funda- 
mental proposition  the  fact  that  any  man  who  claims  to 

♦Dow's  Theory. 


THE     ABC     OF     STOCK    SPECULATION".  79 

know  what  the  market  is  going  to  do  any  more  than  to  say 
that  he  thinks  this  or  that  will  occur  as  a  result  of  certain 
specified  conditions  is  unworthy  of  trust  as  a  broker.  Any 
man  who  claims  that  he  can  take  discretionary  accounts 
and  habitually  make  money  for  his  customers,  is 
a  fraud;  first,  because  he  knows  when  he  makes  such 
statements  that  he  cannot  do  it  regularly  or  with  cer- 
tainty, and,  second,  because  if  he  could,  he  would  surely 
trade  for  himself  and  would  scorn  working  for  i/g  commis- 
sion when  he  could  just  as  well  have  the  whole  amount 
made. 

The  governors  of  the  Stock  Exchange  will  not  permit 
a  member  of  that  body  to  advertise  that  he  will  take  dis- 
cretionary accounts,  and  any  Stock  Exchange  member  who 
stated  that  he  was  endeavoring  to  build  up  a  business  by 
discretionary  trading  for  customers  would  lose  caste  with 
his  fellow-members.  It  would  be  considered  that  he  was 
either  lacking  in  honesty  or  in  judgment. 

We  do  not  say  that  Stock  Exchange  houses  never  take 
a  discretionary  account.  They  sometimes  do,  but  they 
take  them  unwillingly  in  very  limited  amounts,  only  for 
people  with  whom  they  have  very  confidential  relations 
and  who  understand  speculation  suffilciently  to  expect 
losses  and  failures  quite  as  frequently  as  profits.  It  is 
safe  to  say  that  Stock  Exchange  houses  regard  the  accept- 
ance of  a  discretionary  account  as  a  rather  serious  demand 
upon  personal  friendship,  and  this  not  because  they  do 
not  wish  to  see  their  friends  make  money,  but  because 
they  know  too  well  tHat  a  discretionary  account  often 
means  the  loss  of  both  money  and  friends. 


80  THE     ABC     OF     STOCK     SPECULATION. 

When,  therefore,  men  of  little  or  no  capital  and  little 
or  no  reputation  advertise  boldly  in  the  Sunday  papers 
that  they  desire  discretionary  accounts  from  strangers  and 
will,  for  a  commission  of  %  per  cent.,  guarantee  profits 
ranging  from  25  to  250  per  cent,  per  annum,  commission 
houses  have  but  one  word  with  which-to  describe  the  prop- 
osition and  people  of  practical  experience  in  Wall  Street 
are  amazed  at  the  credulity  of  those  who  send  their  money 
to  be  placed  in  such  accounts  and  who  subsequently  appear 
in  the  company  of  those  who  wail  in  the  outer  rooms  of 
closed  offices  over  the  rascality  which  has  robbed  them  of 
their  hard  earnings. 

The  head  of  a  discretionary  concern  which  was  very 
prominent  a  year  or  two  ago  frequently  said  that  if  the 
United  States  Government  would  let  his  mails  alone  and 
deliver  to  him  the  money  forwarded  by  his  dupes  he  would 
ask  no  better  occupation  and  no  quicker  road  to  wealth. 
Evidence  presented  in  court  has  shown  repeatedly  that 
swindlers  who  have  advertised  to  make  money  for  the 
public  in  speculation  have  received  thousands  of  letters 
containing  money;  that  none  of  this  money  was  ever  in- 
vested in  stocks;  that  the  advertisers  were  not  members 
of  any  exchange  and  did  not  even  pretend  to  have  any 
business  other  than  receiving  and  keeping  the  bulk  of  the 
money  entrusted  to  their  care.  A  small  amount  of  the 
money  received  was  usually  returned  to  senders  as  profits 
on  alleged  transactions. 

This  is  substantially,  we  believe,  the  general  practice. 
If  a  man  sends  $100  to  one  of  the  concerns^  he  is  notified, 
after  a  little  time^  that  he  has  made  $10  and,  a  little 


THE     ABC     OF     STOCK     SPECULATION.  81 

later,  that  his  share  of  a  pool  profit  is  $15.  At  this  point 
he  is  usually  advised  to  send  $100  more  on  account  of  some 
extraordinary  opportunity  which  has  just  arisen.  If  this 
money  is  sent,  he  is  told  that  profits  have  accrued  and  still 
more  money  is  called  for.  Persons  who  call  for  some  of 
their  profits  are  occasionally  given  money  in  order  that 
the  receiver  may  induce  others  to  join  the  list  of  future 
victims. 

The  end,  however,  is  almost,  if  not  quite  invariably, 
a  communication  stating  that  by  some  adverse  and  utterly 
unexpected  fatality  operations  have  been  unsuccessful  and 
the  money  invested  has  been  lost.  It  is  usually  thought 
wise  to  make  the  victims  appear  somewhat  in  debt  in  order 
to  induce  them  by  not  having  to  pay  the  alleged  debt  to 
accept  as  a  mysterious  dispensation  of  Providence  the  loss 
of  their  capital  and  previous  alleged  profits. 

Speculation  is  not  at  its  best  a  simple  and  easy  road  to 
wealth,  but  speculation  through  people  who  advertise 
guaranteed  profits  and  who  call  for  participation  in  blind 
pools  is  as  certain  a  method  of  loss  as  could  possibly  be 
discovered.  The  mere  fact  that  a  man  openly  asks  for  such 
accounts  is  the  most  ample  and  exhaustive  reason  possible 
for  declining  to  give  them. 


82  THE     ABC     OF     STOCK     SPECULATION". 


CHAPTER  XVIII. 

*  The  Liability  foe  Loss. 

Of  a  number  of  inquiries  lately  the  following  is  a  sam- 
ple: "I  was  long  of  stocks  May  9,  1901,  and  was  sold 
out.  The  broker  now  asks  me  to  pay  a  loss  in  excess  of 
my  margin.     Am  I  liable  therefor?" 

This  question  has  never  been  definitely  settled  as  a  mat- 
ter of  law.  There  have  been  a  good  many  decisions  in 
cases  of  this  kind  but  they  have  generally  been  sufficiently 
dissimilar  to  make  each  decision  rest  upon  that  particular 
case,  and  not  as  establishing  a  principle  of  law,  bearing 
thereon.  The  courts  have  shown  a  disposition  to  rule  that 
in  such  cases  trade  customs  must  be  considered  and  that 
such  customs  while  not  making  the  law,  affect  the  bearing 
of  the  law  thereon. 

'  Cases  of  this  kind  generally  fall  under  one  of  two  gen- 
eral divisions.  Either  the  broker  notifies  his  customer 
that  his  margin  is  nearly  exhausted,  or  he  does  not.  It 
is  probably  good  law  to  assume  that  where  a  stock  is 
bought  on  margin  and,  on  a  fall  in  the  price,  the  broker 
calls  on  the  customer  for  more  margin  and  there  is  no 
response  within  a  reasonable  time,  the  broker  is  justified 
in  selling  the  stock  without  a  positive  order  to  do  so  from 
the  customer.  The  courts  have  held  in  such  cases  that  the 
broker  gave  ample  notice  and  the  customer  should  have 

*  Dow's  Theory. 


THE    ABC     OF     STOCK     SPECULATION".  83 

responded  in  time  to  protect  his  interests.  The  broker 
could  not  be  expected  to  wait  more  than  a  reasonable  time. 

In  cases  of  this  class  it  sometimes  happens  that  the 
customer  does  not  think  it  wise  to  put  up  more  margin  and 
orders  the  stock  sold.  It  may  be  sold  at  a  loss  on  account 
of  a  rapid  decline  in  i^rices.  In  this  case,  there  seems  to 
be  little  doubt  of  the  liability  of  the  customer,  because 
the  broker  is  executing  an  order  to  sell  for  the  account  and 
risk  of  that  customer.  Here,  however,  might  enter  special 
questions  as  to  whether  the  broker  was  or  was  not  negli- 
gent in  notifying  the  customer  that  margin  was  needed,  or 
in  the  execution  of  the  order  when  it  was  received,  or  in 
some  other  respect  whereby  the  interest  of  the  customer 
was  allowed  to  suffer. 

The  other  general  class  of  cases  is  where  margin  on  ac- 
counts is  swept  away  by  a  sudden  decline  and  the  broker 
faces  the  question  whether  it  is  better  to  sell  his  customer's 
stock  without  an  order  or  to  endeavor  to  carry  the  cus- 
tomer through  the  decline  with  the  expectation  that  the 
loss,  if  there  is  a  loss,  will  be  made  good  by  the  customer. 

The  tendency  of  decisions  in  these  cases  is  toward  hold- 
ing the  broker  to  rather  close  accountability  for  his  ac- 
tions. The  point  has  been  made  that  the  broker  in  such 
a  case  is  acting  in  a  double  capacity.  First,  as  a  broker  exe- 
cuting an  order  for  a  customer  for  a  commission.  Second, 
as  a  banker  in  making  a  loan  to  this  customer,  being  pro- 
tected therein  by  the  security  of  money  deposited  and  the 
possession  of  the  stock  purchased.  As  a  broker,  the  equity 
might  be  one  way,  while  as  a  banker  it  might  be  exactly 
opposite. 


84  THE     ABC     OF     STOCK     SPECULATION. 

Generally  speaking,  a  banker  has  no  right  to  sell  out  a 
loan  without  notifying  the  borrower,  except  where  there 
has  been  a  special  agreement  permitting  such  action.  This 
fact  leads  banks  and  institutions  in  nearly  all  cases  to  make 
loans  with  a  formal  agreement  authorizing  them  to  sell 
the  collateral  at  their  option  in  case  the  loan  ceases  to  be 
satisfactory.  As  a  matter  of  practice,  banks  call  for  more 
collateral  when  prices  decline.  But  in  cases  of  panic,  or 
the  inability  of  brokers  to  furnish  more  collateral,  loans 
are  frequently  sold  out,  under  the  special  agreement  to 
that  effect. 

Some  commission  houses  protect  themselves  by  a  formal 
agreement  with  customers  similar  to  that  required  by 
banks.  When  a  customer  opens  an  account,  he  signs  an 
agreement  authorizing  the  broker  to  sell  the  stock  bought 
at  his  discretion  in  case  the  margin  runs  down  to  the 
danger  line. 

This  is  undoubtedly  a  wise  method^,  as  it  removes  all 
doubt  as  to  the  position  of  each  party  in  the  premises. 
Such  agreements  are  not  invariably  made  because  in  the 
competition  for  business  brokers  do  not  like  to  impose 
restrictions  which  are  not  universal  and  which  may  have 
a  tendency  to  drive  away  custom.  Nevertheless,  experi- 
ences like  those  of  the  9th  of  May,  have  a  decided  ten- 
■  dency  toward  defining  the  relations  between  broker  and 
customer. 

The  action  of  the  market  May  9  was  so  rapid  as  to  make 
it  impossible  for  a  broker  to  notify  a  customer  of  the 
need  of  more  margin  and  get  a  response  in  time  to  be  of 
any  use.     A  10-point  margin  was  of  no  use  at  a  time 


THE     ABC     OF     STOCK     SPECULATION.  85 

when  stocks  were  falling  10  points  in  five  minutes.  There 
were  many  cases  that  day  in  which  wealthy  commission 
houses  saw  a  large  percentage  of  their  capital  disappear 
in  customers'  accounts  between  11  and  11.30.  The  rapid- 
ity of  the  recovery  was  all  that  saved  multitudes  of  cus- 
tomers and  many  commission  houses.  Loans,  small  and 
large,  were  unsound  and  sound  again  before  lenders  had 
time  to  sell  even  if  they  had  been  disposed  to  do  so. 

There  were,  however,  many  cases  where  stocks  were  sold 
entailing  large  losses  and  the  location  of  these  losses  is 
in  a  number  of  cases  still  in  legal  controversy,  with  the 
probability  that  the  decision  will  turn  more  or  less  upon 
the  circumstances  peculiar  to  each  case.  The  9th  of  May 
was  a  very  extraordinary  day  and  allowance  must  be  made 
for  its  unusual  character.  Stock  Exchange  rules  based 
on  the  occurrences  of  the  9th  of  May  would  prohibit  doing 
business  under  ordinary  conditions,  but  such  days  come 
and  on  this  account  brokers  and  customers  should  make 
provision  for  the  unexpected  by  a  clear  understanding  as 
to  what  shall  be  done  in  emergencies. 

It  is  often  difficult  to  say  what  shall  be  done  when  a 
loss  has  occurred  through  unusual  conditions  and  under 
circumstances  which  made  the  action  taken  largely  discre- 
tionary. This  fact  in  its  application  to  the  May  panic 
has  led  brokers  and  customers  in  cases  to  adopt  a  policy 
of  trying  to  divide  the  loss  equitably  and  with  due  refer- 
ence to  the  facts  involved  in  that  particular  case.  A  jury 
familiar  with  Stock  Exchange  business  would  be  very 
likely  to  render  a  decision  along  somewhat  similar  lines. 


86  THE     ABC     OF     STOCK     SPECULATION". 


CHAPTEE  XIX. 

*  The  Eecurrence  of  Crises.  ,■• 

A  correspondent  writes:  "Is  it  true  that  commercial 
or  stock  exchange  panics  are  approximately  periodic  in 
their  occurrence?" 

The  facts  point  distinctly  in  that  direction,  and  there 
is  reason  back  of  the  facts.  The  reason  is  that  the  busi- 
ness community  has  a  tendency  to  go  from  one  extreme  to 
the  other.  As  a  whole,  it  is  either  contracting  business 
under  a  belief  that  prices  will  be  lower  or  expanding  under 
a  belief  that  prices  will  be  higher.  It  appears  to  take 
ordinarily  five  or  six  years  for  public  confidence  to  go  from 
the  point  of  too  little  hope  to  the  point  of  too  much  confi- 
dence and  then  five  or  six  years  more  to  get  back  to  the 
condition  of  hopelessness. 

This  ten-year  movement  in  England  is  given  in  detail 
by  Professor  Jevons  in  his  attempt  to  show  that  sun  spots 
have  some  bearing  upon  commercial  affairs.  Without  go- 
ing into  the  matter  of  sun  spots  and  their  bearing  upon 
crops,  commerce,  or  states  of  minds,  it  may  be  assumed 
that  Professor  Jevons  has  stated  correctly  the  periods  of 
depression  as  they  have  occurred  in  England  during  the 
last  two  centuries. 

The  dates  given  by  him  as  the  years  in  which  commer- 
cial crises  have  occurred  follow:  1701,  1711,  1712,  1731-2, 

♦Dow's  Theory. 


THE     ABC     OF     STOCK     SPECULATION.  87 

1742,  1753,  1763,  1772-3,  1783,  1793,  1804-5,  1815,  1825, 
1836,  1847,  1857,  1866  and  1878. 

This  makes  a  very  good  showing  for  the  ten-year  theory, 
and  it  is  supported  to  a  considerable  extent  by  what  has 
occurred  in  this  country  during  the  past  century. 

The  first  crisis  in  the  United  States  during  the  nine- 
teenth century  came  in  1814,  and  was  precipitated  by  the 
capture  of  Washington  by  the  British  on  the  24th  of  Au- 
gust in  that  year.  The  Philadelphia  and  New  York  banks 
suspended  payments,  and  for  a  time  the  crisis  was  acute. 
The  difficulties  leading  up  to  this  period  were  the  great 
falling  off  in  foreign  trade  caused  by  the  embargo  and  non- 
intercourse  acts  of  1808,  the  excess  of  public  expenditutes 
over  public  receipts,  and  the  creation  of  a  large  number  of 
state  banks  taking  the  place  of  the  old  United  States  bank. 
Many  of  these  state  banks  lacked  capital  and  issued  cur- 
rency without  sufficient  security. 

There  was  a  near  approach  to  a  crisis  in  1819  as  the 
result  of  a  tremendous  contraction  of  bank  circulation. 
The  previous  increases  of  bank  issues  had  promoted  spec- 
ulation, the  contraction  caused  a  serious  fall  in  the  prices 
of  commodities  and  real  estate.  This,  however,  was  purely 
a  money  panic  as  far  as  its  causes  were  concerned. 

The  European  crisis  in  1825  caused  a  diminished  de- 
mand for  American  products  and  led  to  lower  prices  and 
some  money  stringency  in  1826.  The  situation,  however, 
did  not  become  very  serious  and  was  more  in  the  nature 
of  an  interruption  to  progress  than  a  reversal  of  condi- 
tions. 

The  year  1837  brought  a  great  commercial  panic,  for 


88  THE    ABC     OF     STOCK     SPECULATION. 

which  there  was  abundant  cause.  There  had  been  rapid 
industrial  and  commercial  growth,  with  a  multitude  of 
enterprises  established  ahead  of  the  time.  Crops  were 
deficient,  and  breadstuff s  were  imported.  The  refusal  of 
the  government  to  extend  the  charter  of  the  United  States 
Bank  had  caused  a  radical  change  in  the  banking  business 
of  the  country,  while  the  withdrawal  of  public  deposits 
and  their  lodgment  with  state  banks  had  given  the  foun- 
dation for  abnormal  speculation. 

The  panic  in  Europe  in  1847  exerted  but  little  influence 
in  this  country,  although  there  was  a  serious  loss  in  specie, 
and  the  Mexican  war  had  some  effect  in  checking  enter- 
prises. These  effects,  however,  were  neutralized  somewhat 
by  large  exports  of  breadstuffs  and  later  by  the  discovery 
of  gold  in  1848-9. 

There  was  a  panic  of  the  first  magnitude  in  1857,  fol- 
lowing the  failure  of  the  Ohio  Life  Insurance  &  Trust 
Company  in  August.  This  panic  came  unexpectedly,  al- 
though prices  had  been  falling  for  some  months.  There 
had  been  very  large  railroad  building,  and  the  proportion 
of  specie  held  by  banks  was  very  small  in  proportion  to 
their  loans  and  deposits.  One  of  the  features  of  this 
period  was  the  great  number  of  failures.  The  banks  gen- 
erally suspended  payments  in  October. 

The  London  panic  in  1866  precipitated  by  the  failure  of 
Overend,  Guerney  &  Co.,  was  followed  by  heavy  fall  in 
prices  in  the  Stock  Exchange  here.  In  April  there  had 
been  a  corner  in  Michigan  Southern  and  rampant  specu- 
lation generally,  from  which  the  relapse  was  rather  more 
than  normal. 


THE     ABC     OF     STOCK     SPECULATION.  89 

The  panic  of  September,  1873,  was  a  commercial  as 
-^'ell  as  a  Stock  Exchange  panic.  It  was  the  outcome  of  an 
enormous  conversion  of  floating  into  fixed  capital.  Busi- 
ness had  been  expanded  on  an  enormous  scale,  and  the 
supply  of  money  became  insufficient  for  the  demands  made 
upon  it.  Credit  collapsed  and  the  depression  was  e,x- 
tremely  serious. 

The  year  1884  brought  a  Stock  Exchange  smash  but  not 
a  commercial  crisis.  The  failure  of  the  Marine  Bank, 
Metropolitan  Bank  and  Grant  &  Ward  in  May  was  accom- 
panied by  a  large  fall  in  prices  and  a  general  check  which 
was  felt  throughout  the  year.  The  Trunk  Line  war,  which 
had  lasted  for  several  years,  was  one  of  the  factors  in  this 
period. 

The  panic  of  1893  was  the  outcome  of  a  number  of 
causes — uncertainty  in  regard  to  the  currency  situation, 
the  withdrawal  of  foreign  investments  and  the  fear  of 
radical  tariff  legislation.  The  anxiety  in  regard  to  the 
maintenance  of  the  gold  standard  was  undoubtedly  the 
chief  factor,  as  it  bore  upon  many  others. 

Judging  by  the  past  and  by  the  developments  of  the 
last  six  years,  it  is  not  unreasonable  to  suppose  that  wc 
may  get  at  least  a  stock  exchange  flurry  in  the  next  few 
years.  This  decade  seems  to  be  the  one  for  the  small 
crisis  instead  of  the  large  one — a  type  of  1884  rather  than 
a  recurrence  of  1837,  1873  or  1893. 


90  THE    ABC     OF     STOCK   SPECULATION. 


CHAPTEK  XX. 
Financial  Ckiticism. 

The  stock  market  and  its  relation  to  newspapers  is  a 
much  misunderstood  subject.  With  the  great  increase  in 
speculation  and  public  interest,  the  newspapers  have  re- 
sponded to  a  demand  which,  all  things  considered,  is  filled 
most  creditably.  It  is  only  a  few  years  ago  that  opening, 
high,  and  low  quotations  were  considered  sufficient  to  sat- 
isfy those  interested  in  the  stock  market  and  for  forty 
years  there  had  been  no  improvement.  This  primitive 
method  was  superseded  by  a  oareful  compilation  of  the 
day's  trading,  printed  in  tabulated  form  and  including 
every  sale  made  or  transacted  from  the  ticker,  reproduced 
in  an  afternoon  paper  and  sold  on  the  street  for  a  penny 
twenty  minutes  after  the  closing  of  the  Stock  Exchange. 
This  remarkable  development  in  the  way  of  newspaper 
enterprise  was  made  possible  by  the  present  owner  of  The 
Sun  and  The  Evening  Sun  of  New  York,  who  was  quick 
to  realize  the  value  to  the  public  of  such  a  service  at  the 
astonishing  cost  of  the  country's  smallest  coin.  And  so 
accurate  has  that  service  been  that  it  has  been  accepted  in 
courts  of  law  as  official  in  lieu  of  any  better  or  as  good 
service  from  the  Stock  Exchange  itself. 

Each  newspaper  supports  a  staff  in  Wall  Street  and  the 
Street  itself  is  represented  by  two  reputable  news  bureaus 


THE     ABC     OF     STOCK     SPECULATION.  91 

a  number  of  daily  financial  newspapers  and  several  week- 
lies. 

Stock  market  criticism  is  dependent  largely  upon  tTie 
individual  point  of  view  of  the  writer  and  the  policy  of 
the  newspaper  itself.  An  afternoon  newspaper  market 
review  may  be  an  academic  study  of  the  money  market, 
with  the  Stock  Exchange  subordinated  to  its  relative  posi- 
tion in  the  perspective,  or  it  may  be  a  simple  review  of  the 
influential  news  factors  that  caused  market  fluctuations, 
and  explanations  reduced  to  common  sense.  Or  it  may 
pursue  a  middle  course,  indulging  in  economic  speculations 
and  at  the  same  time  not  losing  sight  of  the  important 
fact  that  the  reader  wishes  to  know  why  particular  stocks 
advanced  or  declined.  A  writer  may  be  ultra-conservative 
and  pessimistic  as  distinguished  from  the  majority  who 
are  given  to  prophecy  and  inclined  to  optimism.  And 
again  he  may  be  honest  or  corrupt,  moral  conditions  that 
are  governed  by  the  individual  and  his  environment. 

The  reliable  critic  usually  endeavors  to  avoid  the  field 
of  prophecy.  It  is  almost  invariably  the  fact  that  in  re- 
viewing the  factors  governing  the  situation  he  will  endeav- 
or to  make  bullist  deductions;  that  is  to  say,  he  is 
prejudiced  in  favor  of  advancing  security  prices  and  the 
prosperity  of  those  who  own  them.  This  is  a  natural 
position  and  one  which  meets  with  the  approval  of  the 
re.ader.  He  is  from  necessity  committed  to  the  construc- 
tive side. 

There  are  times,  though,  when  his  judgment  enables  him 
to  detect  the  approaching  financial  storm  and  sound  a  note 
of  warning.    There  are  writers  who  see  so  many  dangers  in 


93  THE     ABC     OF     STOCK     SPECULATION". 

stock  speculation  and  in  the  tendency  to  human  excesses 
that  scarcely  a  day  passes  that  they  do  not  justifiably  con- 
demn the  market  in  one  phase  or  another.  And  there  are 
others,  corrupted  by  their  own  speculations  or  the  gra- 
tuities of  stock  manipulators,  who  pen  grossly  inaccurate 
and  deceptive  articles  for  pecuniary  gain. 

A  market  review  is  entitled  to  consideration  to  the  ex- 
tent that  it  is  reasonable  and  accurate.  If  it  is  unreason- 
able, inaccurate  and  perhaps  too  radical  in  departing  from 
established  rules  and  customs  it  should  be  ignored.  Per 
contra  the  opposite  qualities  should  make  it  worthy  of 
consideration. 

Corrupt  and  inspired  articles  are  readily  detected. 
Should  the  alleged  facts  not  be  verified;  should  the 
prophet  prove  to  be  a  false  prophet ;  should  the  hand  of  the 
press-agent  be  in  plain  view,  know  then  that  you  are  fol- 
lowing an  unreliable  and  dishonest  guide. 

The  usual  method  employed  in  corrupting  the  financial 
critic  is  for  a  stock  manipulator  to  offer  the  disseminator 
of  news,  views  and  tips,  a  "Call"  on  a  specified  number  of 
shares.  Should  a  pool  have  a  deal  in  view  intending  to  ad- 
vance a  particular  stock  it  will  endeavor  to  obtain  the 
support  of  those  newspaper  writers  who  will  lend  their 
columns  and  their  newspapers  to  the  legitimate  or  illegiti- 
mate movement,  as  the  case  may  be,  for  a  speculative  op- 
portunity to  participate  in  a  small  way  in  the  profits. 

The  representative  of  the  pool  proceeds  in  one  of  two 
ways.  He  will  send  (1)  for  the  individual  writer  and 
offer  him  a  "Call"  on  the  stock  under  manipulation  at  a 
price.    This  price  is  usually  above  the  market.    In  return 


THE     ABC     OF     STOCK     SPECULATION.  93 

the  writer  agrees  to  "boom"  or  "apply  the  hot  air  method" 
as  it  is  required;  or  in  simpler  terms  print  misleading 
statements  to  facilitate  the  sale  of  stocks  to  its  readers. 
A  "Call"  in  such  a  proposition  would  mean  tfikt  the  writer 
received  the  privilege  of  calling  upon  the  manipulator  for 
a  specified  number  of  shares  of  stock  at  a  certain  price. 
If  the  stock  declined  the  privilege  would  have  no  monetary 
value.  If  the  stock  advanced  the  writer  could  sell  the 
stock  against  the  "Call"  and  receive  the  difference  between 
the  price  written  on  the  "Call"  and  the  price  at  which  the 
stock  was  sold^  or  the  transaction  would  be  closed  in  the 
manner  most  acceptable  to  the  man  who  had  paid  the  bribe. 

Or  (2)  the  manipulator  may  send  for  one  newspaper 
writer  who  in  turn  represents  a  combination  of  writers  and 
give  the  newspaper  man  complete  charge  of  the  transaction 
and  the  power  to  distribute  the  "Calls"  as  in  his  judgment 
he  considers  that  the  best  results  can  be  obtained.  Some  of 
these  "Calls"  are  very  profitable  and  others  quite  worth- 
less. They  may  be  repudiated  at  any  time  and  their  hold- 
ers have  no  redress  or  claim.  Their  owners  are  powerless 
to  antagonize  the  interest  which  deceived  them,  for  pub- 
licity means  exposure,  and  exposure  ruin. 

It  must  be  conceded,  however,  that  where  this  form  of 
corruption  exists  it  is  readily  detected  and  that  all  things 
considered  the  newspaper  protects  the  public  better  than 
the  public  are  at  times  willing  to  acknowledge.  The  ma- 
jority of  the  Wall  Street  financial  writers  are  honest  men 
and  will  freely  sacrifice  the  "main  chance"  in  order  to 
state  the  facts. 

Stock  market  critics  endeavor  to  find  a  reason  or  expla- 


94  THE     ABC     OF     STOCK     SPECULATION. 

nation  for  the  day's  fluctuations.  The  price  movement 
may  he  uniform — up  or  down — or  it  may  be  irregular,  one 
stock  or  group  of  stocks  advancing,  others  declining  and 
others  remaining  dull  and  passive.  He  must  search  the 
field  for  the  primary  cause.  At  times  this  cause  may  be 
plain  to  everyone,  again  it  may  be  concealed  from  the  out- 
sider's view  and  yet  again  the  superficial  factors  may  be 
written  down  as  the  cause  when  the  true  facts  are  com- 
pletely hidden.  The  speculator  can  form  his  own  conclu- 
sions regarding  the  merits  of  each  critic  by  a  study  of  the 
latter's  work. 

The  criticism  has  been  frequently  made  by  speculators 
that  nine  out  of  ten  newspapers  are  bullish  at  all  times 
and  through  all  markets.  This  is  true,  and  the  following 
story  will  partially  explain  why :  The  editor  of  a  financial 
journal  was  a  bear  on  the  market.  He  believed  in  lower 
prices.  He  was  committed  to  short  contracts  in  the  mar- 
ket and  from  day  to  day  he  gave  his  readers  the  benefit  of 
his  convictions,  honestly  and  with  enthusiasm.  The  mar- 
ket declined.  Day  by  day,  however,  he  lost  subscribers, 
until  finally  the  losses  became  too  serious  to  be  ignored. 
An  important  commission  house  among  others  notified 
him  to  discontinue  its  subscription  of  three  copies.  He 
first  sent  his  business  manager  to  the  house  in  question  for 
an  explanation.  A  member  of  the  firm  said :  "Your  paper 
is  bearish  on  the  market.  All  our  customers  are  bulls. 
Your  paper  is  on  file  in  our  offices  and  our  customers  find 
a  great  deal  of  fault  with  it.  It  makes  somes  of  them 
very  angry." 

"But  we  have  been  right  on  the  market?" 


THE     ABC     OF     STOCK     SPECULATION.  95 

"I  can't  help  that;  wc  can  no  longer  ignore  the  com- 
plaints, for  they  are  too  numerous." 

^'If  you  continue  to  run  a  bear  paper,"  reported  the  bus- 
iness manager  to  his  editor,  "you  will  ruin  yourself." 

The  conclusion  appears  to  be  that  the  public  will  buy  a 
newspaper  that  is  bullish  and  wrong  in  its  judgment,  and 
desert  a  paper  that  is  bearish  and  correct  in  its  judgment. 

The  value  of  a  newspaper  writer's  market  views  may 
depend  to  some  extent  on  whether  he  is  a  speculator  or  an 
onlooker.  Most  newspaper  writers  speculate,  although  a 
minority  do  not.  Undoubtedly  the  one  who  does  not  spec- 
ulate is  in  a  better  position  to  advise  than  one  who  is  prej- 
udiced in  favor  of  his  own  ventures  just  as  the  advice  of 
the  non-speculating  broker  is  to  be  preferred  to  that  of  the 
speculator. 

The  field  of  j)rophecy  is  invaded  to  a  greater  or  less 
extent  by  all  financial  critics.  The  more  experienced  the 
writer  the  less  positive  he  will  be  in  making  predictions 
regarding  price  movements.  It  will  also  be  observed  by 
the  speculator  that  the  newspaper  critic  will  carefully 
state  two  sides  of  a  proposition  and  leave  the  reader  in 
complete  and  illuminating  possession  of  the  fact  that  if 
"the  market  (or  a  special  stock)  does  not  go  up  it  will  go 
down."  This  is  the  easiest  way  out  of  a  complicated  situ- 
ation and  the  reader  can  hardly  dispute  the  accuracy  of  the 
conclusion. 

Wall  Street  is  served  by  two  news  bureaus  with  great 
energy.  They  print  and  distribute  daily  a  mass  of  facts, 
figures,  comment,  prophecy  and  rumor.  There  are  traders 
who  find  the  compilation  at  times  so  confusing  and  con- 


96  THE     ABC     OF     STOCK     SPECULATION, 

tradictory  that  they  ignore  everything  except  definite  new. 
statements.  Nevertheless,  Wall  Street  would  find  it  ex- 
ceedingly difficult  to  get  along  without  its  news  service, 
and  it  is  a  fact  that  each  bureau  strives  with  energy  and 
intelligence  to  be  accurate.  At  the  conclusion  of  each  day 
each  bureau  has  a  method  of  so  analyzing  the  day's  work 
that  mis-statements  are  accounted  for  by  the  reporters  re- 
sponsible. 

The  speculating  student  of  the  news  bureau  service 
should  learn  to  differentiate  between  the  varying  state- 
ments. It  is  the  desire  of  the  bureau  to  print  all  rumor 
and  gossip  that  it  can  gather  and  the  relative  values  as 
market  factors  are  very  wide  apart.  For  example,  a  state- 
ment made  by  the  president  of  a  bank  of  acknowledged 
authority  is  entitled  to  more  consideration  than  an  inter- 
view with  "a  leading  banker.''  Then  again  a  review  of 
business  conditions  by  a  railroad  officer  under  his  name 
is  more  to  be  relied  upon  than  the  prophecies  of  a  specu- 
lator along  the  same  line.  And  to  judge  of  the  value  of  a 
statement  regarding  the  copper,  iron,  or  any  other  indus- 
try one  must  know  something  about  the  man,  his  reputa- 
tion and  his  associates.  Crop  reports  and  opinions  are 
notoriously  misleading.  Financial  statements  and  statis- 
tical tables  must  be  accepted  with  conservatism.  The  ten- 
dency is  always  to  exaggeration  rather  than  the  opposite 
direction.  The  news  bureaus  do  their  work  well  and  in 
this  respect  Wall  Street  ranks  ahead  of  Lombard  Street. 
If  the  speculator  is  to  derive  value  from  their  service  he 
must  learn  to  classify  the  various  items  in  the  same  spirit 
in  which  they  are  printed. 


THE     ABC     OF     STOCK     SPECULATION.  97 

The  genesis  of  a  Wall  Street  rumor  is  a  curious  thing 
in  itself.  It  is  the  function  of  the  news  bureau  and  the 
newspaper  to  print  rumors  whenever  they  appear  to  have 
foundation  in  fact.  A  rumor  should  always  be  verified 
before  it  is  spread  l)roadcast;,  but  this  sound  rule  of  the 
newspaper  is  as  often  ignored  as  it  is  followed.  Humors 
are  thickest  regarding  coming  events  which,  according  to 
the  old  adage,  cast  their  shadows  l)efore. 

For  the  purpose  of  illustration  we  will  say  that  the 
Alphabet  Mining  Company  is  to  have  a  dividend  meeting 
on  the  loth  of  the  month.  A  change  is  to  be  made  in  the 
dividend  as  the  company  is  doing  a  poor  business.  The 
rate  of  dividend  had  been  6  per  cent,  ^per  annum.  It  is 
reasonable  to  say  that  between  the  10th  and  the  15th  fol- 
lowing will  be  some  of  the  rumors: 

(1)     The  dividend  will  be  passed. 

(3)     The  dividend  will  be  reduced  to  4  per  cent. 

(3)  A  director  says  that  the  present  dividend  will 
be  maintained  as  the  situation  is  not  as  bad  as  represented. 

(4)  The  dividend  will  be  reduced  to  5  per  cent. 

(5)  The  directors  will  postpone  their  meeting. 

And  so  on  others  suggest  themselves  as  even  more  com- 
monplace. Or  it  may  be  a  railroad  meeting  when  it  is 
intended  to  advance  the  rate  of  dividend  and  the  com- 
pany has  been  subjected  to  rumors  of  change  of  control,- 
Prior  to  such  a  meeting  the  rumor  maker  is  a  very  busy 
man. 

Again,  in  times  of  panic,  the  writer  has  found  it  diffi- 
cult to  walk  a  few  blocks  in  the  Wall  Street  district  with- 
out being  stopped  and  "confidentially"  informed  that  such 


98  THE     ABC     OF     STOCK     SPECULATION". 

and-such  a  house  is  "in  trouble."  It  is  then  that  great 
mischief  and  injury  can  be  accomplished  by  the  news- 
paper writer,  who  must  use  tact  and  discretion  in  "killing"" 
such  rumors  as  they  arise,  for  they  are  rarely  based  on 
facts.  When  failures  occur,  they  are  frequently  unher- 
alded and  rarely  preceded  by  rumors. 

When  private  wires  between  New  York,  Boston  and 
Chicago  become  commonplace  the  two  latter  cities  become 
responsible  for  many  Wall  Street  rumors.  Chicago  in  par- 
ticular seemed  to  keep  a  stereotyped  line  which  read :    "It 

is  reported  that  is  dead."     The  blank  space  was 

filled  in  with  the  name  of  the  President  of  the  United 
States  or  that  of  any  other  person  who  would  attract 
speedy  attention.  Boston's  fancy  ran  to  the  creation  of 
beautiful  stories  of  mining,  industrial  and  railroad  deals. 
At  times  they  have  been  worthy  of  an  Indiana  novelist 
for  power  of  imagination  and  gift  of  expression. 

The  newspaper  writer  acquires  the  knack  of  almost 
knowing  offhand  the  truth  or  falsity  of  a  rumor.  If  it 
originates  with  a  man  who  prefaces  his  statement  with 
"I  hear,"  "They  say,"  "It  is  said,"  "A  man  I  don't  know 
says,"  or  any  other  source  of  information  equally  unrelia- 
ble, it  is  well  to  disbelieve  the  rumor.  If  a  definite  au- 
thority is  named  for  the  rumor,  and  it  is  not  received  at 
second  or  third  hand,  then  you  may  have  something  worthy 
of  investigation.  A  rumor  is  known  by  its  father.  A 
speculator  should  study  the  relative  values  of  rumors  and 
learn  to  take  advantage  of  their  market  effects,  always 
remembering  that  90  per  cent,  of  them  are  not  true,  but 
that  fi'ctioti  as  well  as  fact  prevails  in  price  making. 


THE     ABC     OF     STOCK     SPECULATION.  99 

In  conclusion,  it  can  be  said  that  the  financial  writer 
docs  not  expect  his  reader  to  accept  his  views  as  final.  It 
is  not  the  function  of  the  financial  writer  to  win  or  lose 
money  in  speculation  for  the  reader  as  so  many  small 
speculators  believe.  It  is  rather  his  duty  to  discuss  as 
they  arise  those  factors  which  govern  the  financial  and 
economic  situation,  giving  to  each  its  proper  place,  and 
considering  each  with  common  sense,  even  temper  and 
mature  judgment. 

The  speculator  will  do  well  to  remember  that  the  finan- 
cial writer  has  his  own  theories  and  prejudices;  good,  bad 
or  indifferent  judgment,  and  is  only  the  doctor  in  so  far 
as  he  endeavors  to  diagnose  the  case.  He  differs  from  the 
doctor  in  that  he  does  not  prescribe  for  the  patient.  Should 
he  prescribe  and  become  a  prophet  of  prices,  he  is  then 
like  the  doctor  and  also  the  lawyer  in  that  he  is  not  re- 
sponsible for  mistakes  of  judgment.  The  speculator  pays 
the  bill. 

A  writer  in  the  Wall  Street  Journal  discusses  this  ques- 
tion as  follows: 

A  correspondent  asks :  "I  notice  that  practically  all  the 
financial  articles  in  the  daily  newspapers  and  most  of  the 
discussions  of  financial  matters  in  other  financial  papers 
are  always  bullish  in  character.  Why  is  this  ?  I  have  been 
reading  financial  articles  for  many  years,  and,  with  very 
few  exceptions,  this  has  always  been  so.  Can  you  explain 
it?" 

In  order  to  understand  what  is  involved  in  the  answer 
to  the  above  query,  it  is  necessary  to  have  a  clear  idea  of 
what  a  "bull"  is.    A  bull  is  a  man  who  has  something  to 


100  THE     ABC     OF     STOCK     SPECULATION. 

sell  and  is  desirous  of  selling  it  at  a  good  price.  Conse- 
quently he  is  anxious  for  prices  to  go  up  in  order  that  he 
may  sell.  A  bear,  on  the  contrary,  is  a  man  who  wishes 
to  buy  at  a  low  price. 

Now,  the  end  and  object  of  all  Wall  Street  finance  is 
just  one  thing,  namely,  the  gathering  up  of  public  money 
in  exchange  for  securities  distributed  to  the  public.  A 
Wall  Street  banker  in  active  business  is  engaged  in  a  pro- 
cess that  may  be  called  the  manufacture  and  sale  of  securi- 
ties. Much  the  largest  part  of  his  work  consists  in  turn- 
ing securities  into  cash,  either  for  his  own  account  or  for 
the  account  of  other  bankers,  in  return  for  a  commission. 
There  are  times  when  the  financial  community  needs  the 
public's  money  less  than  at  other  times,  but,  taking  it  all 
in  all,  anything  that  tends  to  whet  the  public's  appetite 
for  securities  so  that  it  is  in  a  mood  to  exchange  its  cash 
for  securities  is  satisfactory  to  what  are  commonly  called 
the  large  financial  interests. 

Consequently  these  large  financial  interests  are  always, 
or  almost  always,  concerned  in  keeping  the  public  in 
proper  disposition  toward  the  security  market.  They  are 
always  anxious  to  prevent  the  public  from  becoming 
alarmed,  and  they  are  usually  willing  to  assist  in  stimulat- 
ing the  public's  speculative  desires.  This  is  probably  one 
reason  why  the  published  articles  in  the  daily  papers  are 
so  generally  optimistic  in  character  alike  through  good  and 
bad  times.  It  has  become  a  maxim  in  Wall  Street  that 
the  public,  or,  rather,  Wall  Street,  will  endure  any  amount 
of  inaccuracy,  and  even  misrepresentation,  as  long  as  its 
effect  is  bullish  at  least  for  the  time  being. 


THE     ABC     OF     STOCK     SPECULATION.  101 

The  public  does  not  realize,  and  probably  never  will 
realize,  that  it  is  the  court  of  last  resort  in  all  important 
financial  operations.  It  is  its  custom  to  regard  itself  as 
helpless,  at  the  mercy  of  shrewd  financiers  and  unscrupu- 
lous speculators.  If  it  could  only  once  get  it  into  its  head 
that  it  holds  the  key  to  the  situation  in  its  own  hands  and 
that  without  its  money  the  large  financial  interests  could 
of  themselves  do  little  or  nothing,  and  if,  in  addition  to 
this,  it  would  take  a  little  pains  to  inform  itself  as  to 
actual  facts,  figures  and  values,  very  much  less  money 
would  be  lost  in  Wall  Street  and  a  great  many  enterprises 
would  never  be  undertaken.  Stocks  and  bonds  are  never 
sold  until  they  are  sold  to  the  public.  Manipulators  may 
move  prices  up  and  down  on  the  Exchange  and  may  make 
fictitious  transactions  to  an  enormous  extent,  but  unless 
the  public  comes  with  its  money  and  buys  the  securities, 
the  work  is  unavailing. 

Of  course,  it  is  not  fair  to  suggest  that  the  generally 
bullish  character  of  financial  comment  at  all  times  is  the 
result  of  prearranged  plans  in  behalf  of  the  large  finan- 
cial interests  as  against  the  public.  The  hopeful  and  even 
the  optimistic  side  of  things  is  necessarily  the  more  popu- 
lar of  the  two  sides.  Moreover,  as  a  rule,  the  conditions 
that  make  for  higher  prices  of  seciirities  are  conditions 
favorable  to  the  business  world  and  to  the  pul)lic.  Conse- 
quently it  is  pleasanter  to  look  at  the  cheerful  side  of 
things  than  at  the  other  side.  Nevertheless,  it  is  perhaps 
true  to  say  that,  on  the  whole,  there  is  somewhat  too  much 
of  this  kind  of  thing  and  too  little  of  its  opposite.  Only 
too  often  it  has  happened  that  the  public  has  been  pretty 


lO'/J  THE     ABC     OF     STOCK     SPECULATION". 

generally  encouraged  up  to  the  last  minute,  and  when  trou- 
ble has  come  and  the  public's  money  has  been  lost,  the 
only  consolation  that  it  gets  is  usually  in  the  form  of  a 
mild  scolding  for  not  having  foreseen  the  trouble  l)efore 
it  came. 

A  healthy  skepticism  is  seldom  out  of  place  in  Wall 
Street,  so  far  as  speculation  is  concerned.  Money  is  very 
seldom  lost  thereby.  People  who  have  had  experience  cov- 
ering one  or  two  panics  know  very  well  that  the  first  lesson 
that  has  to  be  learned  by  the  successful  speculator  is  the 
avoidance  of  the  disaster  always  caused  by  a  panic.  The 
very  essence  of  a  panic  is  that  it  sweeps  away  every  one 
who  is  overtrading — whether  it  be  to  a  large  or  to  a  small 
extent.  Of  what  use  is  it  to  pile  up  imposing  paper  profits 
if  they  are  all  to  be  swept  away  when  the  tidal  wave 
strikes?  The  only  way  whereby  people  can  avoid  being 
caught  in  a  panic  is  by  the  exercise  at  all  times  of  great 
conservatism  and  considerable  skepticism.  The  successful 
speculator  must  be  content  at  times  to  ignore  probably 
two  out  of  every  three  apparent  opportunities  to  make 
money,  and  must  know  how  to  sell  and  take  his  profits 
when  the  "bull"  chorus  is  loudest.  When  he  has  learned 
that  much,  he  has  learned  a  great  deal. 


THE     ABC     OF     STOCK     SPECULATION,  103 


CHAPTER  XXI. 
The  Physical  Position  of  the  Stock  Speculator. 

It  is  a  habit  with  some  active  speculators  to  attribute 
their  own  lack  of  success  to  advantages  of  physical  posi- 
tion; that  is  to  say,  the  outside  trader  believes  that  the 
member  of  the  Exchange  is  in  a  relatively  more  advanta- 
geous position  to  make  money.  The  broker  is  "on  the 
spot,"  and  is  in  such  close  relationship  to  the  market  that 
he  commands  greater  opportunities  and  less  risk  than  the 
outsider,  according  to  the  latter's  conclusion,  which  is  not 
always  true.  As  a  fact,  however,  they  occupy  distinctly 
different  positions  and  employ  radically  different  methods, 
although  having  the  same  object,  viz.,  money  making. 

It  is  reasonable  to  hold  that  tlie  member  of  the  Ex- 
change who  trades  for  his  own  account,  occupies  a  rela-* 
tionship  to  tbe  market  which  gives  him  substantial  advan- 
tages— independent  of  commissions — as  compared  with  his 
position  were  he  an  outside  trader,  located  in  New  York, 
Chicago  or  elsewhere. 

As  an  illustration  we  can  use  the  case  of  a  young  Chi- 
cago Hebrew,  who  had  been  graduated  from  Harvard,  and 
who  selected  stock  tra.ding  as  a  vocation.  His  father,  a 
successful  trader,  was  in  complete  sympathy  with  his  am- 
bition. The  young  man  started  to  trade  in  the  New  York 
Stock  Exchange  market  over  a   Chicago  wire.     He  lost 


104  THE     ABC     OF     STOCK     SPECULATION. 

money.  He  figured  that  as  a  trader  he  was  handicapped 
by  certain  conditions  which  he  could  eliminate.  His  view 
was  that  he  lost  several  minutes  in  the  transmission  of  the 
quotations  from  the  floor  of  the  Exchange  over  the  ticker, 
more  time  in  the  transmission  of  the  quotations  from  New 
York  to  Chicago,  additional  time  in  their  distribution 
throughout  that  city  and  fresh  delay  in  the  transmission 
of  his  order  to  New  York,  thence  to  the  Exchange,  and  in 
its  execution.  Although  the  machinery  required  in  the 
processes  enumerated  has  been  perfected  in  a  high  degree 
and  narrowed  down  to  seconds,  the  trader  who  sought  to 
make  "quick  turns"  undoubtedly  clearly  comprehended  the 
disadvantages  or  handicaps  under  which  he  labored. 

He  therefore  left  Chicago  for  New  York,  and  trade^ 
from  the  office  of  a  Stock  Exchange  house,  alternately 
watching  and  studying  the  ticker  or  the  blackboard  quo- 
tations as  his  fancy  dictated.  The  real  or  imagined  ad- 
vantages did  not  result  in  substantial  profits  and  after  a 
fair  trial  of  trading  from  the  outside  he  bought  a  Stock 
Exchange  membership  and  became  a  daily  trader.  He  was 
now  free  to  roam  as  he  pleased,  study  the  habits  and  meth- 
ods of  individual  brokers  and  groups  of  brokers  in  the  exe- 
cution of  orders,  %e  tricks  of  the  trade,  the  relative  value 
of  gossip  designed  to  make  fluctuations.  His  early  specu- 
lations were  by  no  means  entirely  successful;  parental  as- 
sistance being  required  to  help  the  young  trader  carry  a 
block  of  stock  with  which  he  became  entangled  in  a  brief 
period  of  great  mental  excitement. 

At  the  expiration  of  a  year,  however,  the  trader  had  be- 
come a  practical  money  maker  who  derived  his  livelihood 


THE     ABC     OF     STOCK     SPECULATION.  105 

from  daily  hazards  in  the  stock  market.  He  is,  as  might 
be  expected,  of  the  opinion  that  as  an  active  trader  he  is 
free  from  disadvantages  with  which  the  outsider  has  to 
contend. 

But  it  may  be  held  that  not  all  traders  may  become 
members  of  the  Stock  Exchange  and  that  to  become  a 
"trader-broker"  requires  qualities  of  temperament  not  al- 
ways to  be  found  in  successful  speculators  who  are  not 
Exchange  members.  And  the  outsider  may  hold  that, 
given  capable  brokers,  a  quiet  office,  a  ticker  and  the  news 
of  the  day,  and  his  advantages  will  more  than  offset  those 
of  the  Exchange  member.  In  the  first  place  he  will  prefer 
a  quiet  office  to  the  babel  of  voices  and  confusion  of  the 
Exchange  floor.  Absolute  quiet  may  be  to  him  a  foremost 
consideration.  Secondly,  he  sits  alongside  the  ticker  from 
which  position  he  can  study  purchases  and  sales,  supply 
and  demand  and  market  tones,  factors  that  call  for  care- 
ful study  by  the  professional  trader.  The  time  lost  in  the 
execution  of  his  order  he  regards  as  more  than  offset  by 
the  condition  which  enables  him  to  calmly  read  the  tape 
and  draw  rapid  conclusions  as  to  the  significance  of  the 
transactions  so  quickly  printed. 

Yet  another  consideration  is  that  which  comes  from 
trading  in  an  office  receiving  good  market  gossip,  calcu- 
lated to  influence  prices.  Thus  one  office  may  possess  very 
substantial  advantages  over  another.  It  may  be  repre- 
sented on  the  floor  by  brokers  clever  enough  to  keep  the 
office  informed  of  the  Board  Koom  gossip  and  news ;  it  may 
possess  superior  sources  of  news  information,  such  as 
newspaper  financial  writers  occupying  desk  room  therein 


106  THE     ABC     OP     STOCK     SPECULATION. 

or  close  relationship  with  this  or  that  powerful  specula- 
tive or  banking  faction  or  clique.  The  successful  outside 
trader  knows  that  market  activity  on  his  part  must  be 
accompanied  by  quick  decision,  the  possession  of  correct 
market  judgment  and  the  entire  day  at  his  disposal. 

Men  rather  than  markets  differ.  The  experience  of 
traders  suggests  the  conclusion  that  as  each  trader  has  a 
different  temperament,  arriving  at  conclusions  from  en- 
tirely different  points  of  view,  and  calling  for  different 
conditions,  each  position  (1)  trading  on  the  Exchange 
floor  and  (2)  trading  from  a  Xew  York  office  in  a  fa- 
vorable environment,  has  advantages  and  disadvantages 
which  almost  balance. 

In  this  consideration  of  the  questions  involved  the  point 
of  view  prevails  that  each  of  the  two  brokers  is  an  Ex- 
change member.  One  executes  his  own  orders,  after  which 
it  costs  him  $1.12  to  clear  each  lOD  shares  of  stock,  while 
the  other  intrusts  the  execution  to  another  member  and 
the  net  cost  is  $3.12  per  109  shares.  The  floor  trader, 
therefore,  has  a  $2  advantage  on  each  100  share  trade. 
Should  the  outside  trader  not  be  a  member  of  the  Ex- 
change his  commission  bills  will  place  him  in  this  posi- 
tion: The  board  member  holds  a  $75,000  membership. 
Money  is,  say,  worth  5  per  cent,  and  therefore  his  initial 
expense  is  $3,750  per  annum.  To  be  even  with  the  game 
he  must  net  that  sum  in  any  one  year,  plus  his  clearance 
bills.  The  outsider  starts  Avithout  any  fixed  charge  of 
this  character.  Should,  however,  the  outsider  be  a  very 
active  or  heavy  trader  his  commission  bills  would  soon 
exceed  the  expenses  of  the  Exchange  member.    The  aver- 


THE     ABC     OF     STOCK    SPECULATION.  107 

age  trader,  however,  does  not  pay  $3,750  a  year  in  com- 
missions. This  question  o:^  expense  is  one  to  be  determined 
by  the  individual  trader,  who  should  have  no  difficulty  in 
arriving  at  the  proper  course  to  pursue. 

To  compare  the  number  of  successful  outside  traders 
with  the  number  of  successful  Exchange  member  traders 
does  not  lead  to  accurate  conclusions.  The  number  of 
traders  in  the  1,100  membership  of  the  Stock  Exchange  is 
of  necessity  limited,  and  the  number  of  outside  traders  is 
many  times  greater,  consequently  the  -outsiders  can  point 
to  superior  numbers.  But  in  comparing  the  accounts  of 
25  members  and  25  outside  traders  the  figures  would  favor 
the  members. 

Consideration  of  the  questions  involved  will  lead  to  the 
conclusion  that  the  outside  daily  trader,  dealing  from  a 
branch  office  in  New  York  or  in  another  city,  is  at  a  round 
disadvantage  as  compared  with  the  floor-trading  member 
or  the  office-trading  member. 

The  experience  of  Wall  Street  men,  legitimate  brokers 
and  bucket  shop  proprietors,  is  that  the  outside  daily 
trader  (not  an  Exchange  member)  is  rarely  successful. 
He  is  reduced  to  the  position  of  a  bettor,  heavily  handi- 
capped, and  obliged  to  pay  a  fee  of  $25  on  each  guess, 
plus  the  interest  on  his  account.  It  must  be  conceded, 
however,  that  the  chances  of  failure  of  the  occasional 
trader,  who  deals  from  a  distance,  are  obviously  not  so 
great  as  those  of  the  trader  making  daily  ventures.  Where 
the  latter  is  almost  absolutely  certain  to  fail  in  the  long 
run,  the  occasional  trader  occupies  a  very  much  safer 
position. 


108  THE     ABC     OF     STOCK     SPECULATION. 


\ 

CHAPTER  XXII. 

Temperament  and  Equipment. 

The  man  of  phlegmatic  temperament,  who  can  lose 
without  feeling  mental  depression  and  who  can  win  with- 
out corresponding  elation,  is  the  man  who  is  best  adapted 
for  speculation,  provided  he  possesses  the  other  necessary 
qualifications.  It  should  not  be  understood,  however,  that 
the  nervous  temperament  is  not  represented  by  many  suc- 
cessful speculators;  in  fact  the  majority  of  speculators  are 
very  nervous  men.  Many  of  them  are  troubled  with  nerv- 
ous diseases.  The  most  successful  stock  speculators  of  the 
day  are  sufferers  from  nervous  indigestion,  attributable 
to  worry  and  irregular  habits  in  eating  and  drinking  dur- 
ing periods  of  active  speculation.  There  are  speculators 
who  are  unable  to  eat  during  the  Stock  Exchange  session; 
others  can  digest  only  the  lightest  and  most  digestible 
foods;  others  smoke  and  drink  freely  and  do  not  eat,  and 
still  others,  win  or  lose,  eat  heartily  with  unimpaired  di- 
gestive organs.  The  advantage  is  naturally  with  the  latter 
group,  for  such  a  temperament,  with  regular  habits,  makes 
far  stronger  vitality  than  is  possessed  by  the  extremely 
nervous  man.  A  sound  body  makes  a  sound  mind,  and 
good  health  is  a  factor  of  importance  with  the  speculator. 
One  of  the  cleverest  of  the  younger  speculators  on  the 
Stock  Exchange  inherited  his  membership  from  his  father. 


THE     ABC     OF     STOCK     SPECULATION.  109 

also  a  successful  speculator,  and  who  died  of  a  nervous 
disease  which  was  in  all  probability  attributable  to  the  un- 
certainty of  his  trade.  The  son,  who  is  essentially  a  money- 
maker, rivaling  his  father,  suffers  from  nervousness  to  a 
greater  degree  than  his  father,  and  at  frequent  intervals  is 
obliged  to  leave  Wall  Street  and  travel  for  rest  and  recrea- 
tion. 

An  unknown  writer,  considering  the  qualities  essential 
to  the  equipment  of  a  speculator,  names  them  in  this 
order:  (1)  self-reliance;  (2)  judgment;  (3)  courage;  (4) 
prudence;  (5)  pliability. 

"1.  Self-reliance.  A  man  must  think  for  himself; 
must  follow  his  own  convictions.  George  Macdonald  says : 
'A  man  cannot  have  another  man's  ideas  any  more  than 
he  can  have  another  man's  soul  or  another  man's  body.' 
Self-trust  is  the  foundation  of  successful  effort. 

"2.  Judgment.  That  EQUIPOISE,  that  nice  adjust- 
ment of  the  faculties  one  to  the  other  which  is  called  good 
judgment,  is  an  essential  to  the  speculator. 

"3.  Courage.  That  is,  confidence  to  act  on  the  decisions 
of  the  mind.  In  speculation  there  is  value  in  Mirabeau's 
dictum:    'Be  bold,  still  be  bold,  always  be  bold.' 

"4.  Prudence.  The  power  of  measuring  the  danger,  to- 
gether with  a  certain  alertness  and  watchfulness,  is  very 
important.  There  should  be  a  balance  of  these  two,  pru- 
dence and  courage;  prudence  in  contemplation,  courage  in 
execution.  Lord  Bacon  says:  'In  meditation  all  dan- 
gers should  be  seen ;  in  execution  none,  unless  very  formid- 
able.' Connected  with  these  qualities,  properly  an  out- 
growth of  them,  is  a  third,  viz.,  promptness.     The  mind 


110  THE    ABC     OF     STOCK     SPECULATION. 

convinced,  the  act  should  follow.  In  the  words  of  Mac- 
beth: 'Henceforth  the  very  firstlings  of  my  heart  shall 
be  the  firstlings  of  my  hand.'    Think,  act,  promptly. 

"5.  Pliability.  The  ability  to  change  an  opinion,  the 
power  of  revision.  'He  who  observes,'  says  Emerson  'and, 
observes  again,  is  always  formidable.' 

"The  qualifications  named  are  necessary  to  the  make-up 
of  a  speculator,  but  they  must  be  in  well-balanced  combi- 
nation. A  deficiency  or  an  overplus  of  one  quality  will 
destroy  the  effectiveness  of  all.  The  possession  of  such 
faculties  in  a  proper  adjustment  is,  of  course,  uncommon. 
In  speculation,  as  in  life,  few  succeed;  many  fail." 


THE     ABC     OF    STOCK    SPECULATION.  Ill 


CHAPTER  XXIII. 
The  Brokek  and  his  Client. 

There  are  two  classes  of  brokers  dealing  with  the  pub- 
lic: (1)  the  speculating  stock  broker,  and  (3)  the  non- 
speculating  stock  broker. 

Preferably,  the  broker  who  does  not  speculate  is  to  be 
employed.  He  occupies  an  unprejudiced  position  toward 
the  market,  and  his  opinion  is  therefore  more  valuable  than 
that  of  the  broker  who  is  a  speculator,  and  is  swayed  this 
way  and  that  by  every  turn  in  the  market.  What  is  more 
natural  than  that  he  should  advise  his  customer  to  trade 
as  he  is  trading  in  the  conviction  that  his  judgment  is 
right  and  in  the  belief  that  the  customer's  trade  will  help 
his  own? 

A  physician  will  not  prescribe  for  himself  or  his  family 
treatment  that  he  will  successfully  prescribe  for  others. 
Some  brokers  acknowledge,  without  hesitation,  that  while 
they  can  successfully  advise  and  conduct  the  market  opera- 
tions of  other  persons  they  are  dismal  failures  in  conduct- 
ing ventures  for  their  own  account.  Many  firms  of  bro- 
kers— and  they  are  to  be  preferred  in  the  selection  of  a" 
broker — on  signing  articles  of  copartnership  stipulate  that 
no  firm  member  shall  be  permitted  to  speculate.  Experi- 
ence has  taught  them  that  in  this  way  only  are  the  risks  of 
the  stock  commission  trade  minimized.     Large  operators 


112  THE     ABC     OF     STOCK     SPECULATION. 

select  houses  of  this  class  for  the  execution  of  manipula- 
tive orders  whenever  it  is  possible  to  do  so.  By  so  doing 
they  increase  the  margin  of  safety  from  the  points  of  view 
of  non-interference  and  financial  stability. 

There  are  traders  who  believe  that  the  chances  of  suc- 
cess are  increased  when  they  trade  with  a  firm  which  is 
identified  with  the  operations  of  a  leading  manipulator. 
At  times  doubtless  this  selection  is  to  be  commended,  pro- 
vided the  trader  always  remembers  that  his  interests  are 
distinctly  a  secondary  consideration  and  that  in  an  emer- 
gency the  operator  in  question  will  protect  himself  even  at 
the  expense  of  the  customers. 

A  trader  in  stocks  should,  when  possible,  make  a  study 
of  his  broker.  He  will  find  that  brokers  vary  as  much  in 
mental  habit  and  conscience  as  they  do  in  appearance. 
There  are  brokers  who  will  ascertain  what  their  customers 
are  desirous  of  doing  in  the  market  and  advise  them  ac- 
cordingly. The  writer  on  more  than  one  occasion  has 
heard  brokers  offer  advice  that  was  absolutely  contradic- 
tory in  the  effort  to  influence  trading.  For  example:  A 
was  advised  to  buy  a  certain  stock,  having  expressed  belief 
in  the  view  that  it  would  advance,  while  B,  ten  minutes 
later  was  advised  to  sell  the  same  stock  short,  having  in- 
formed his  broker  that  he  believed  in  a  decline.  The 
singular  result  was  that  both  customers  lost  money,  each 
trader  closing  out  at  a  loss  on  the  minor  fluctuations.  The 
broker  encouraged  "trading"  and  profited  by  his  commis- 
sions. There  are  brokers  who  will  strain  their  consciences 
to  the  point  of  spraining  to  encourage  trading,  but  they 
should  not  be  difficult  to  detect. 


THE     ABC     OF     STOCK     SPECULATION.  113 

In  opening  an  account  the  reputation  of  a  broker  should 
carry  weight.  Is  he  an  old  or  a  new  hand?  Has  he  been 
successful?  Are  his  customers  of  the  permanent  or  tran- 
sient class?  Does  he  advise  frequent  or  occasional  ven- 
tures ? 

The  exigencies  of  his  trade  require  that  the  broker 
should  preserve  an  impassive  demeanor.  He  must  not  be 
disturbed  by  his  clients'  losses.  If  he  were  thus  swayed 
by  sentiment  he  would  be  in  as  dangerous  a  position  as 
the  too  sympathetic  nurse  at  the  bedside  of  a  precariously 
sick  patient.  The  broker  is  navigating  a  craft  that  calls 
for  a  cool  head  at  all  times,  especially  in  times  of  panic. 
If  he  were  to  sympathize  with  every  client  who  loses,  he 
would  soon  be  a  nervous  wreck,  retire  from  business  or 
find  an  exhausted  bank  account.  A  successful  broker  of 
twenty  years'  experience  has  on  his  books  small  accounts 
aggregating  $100,009,  which  he  made  good  with  his  per- 
sonal check,  "I  doubt,"  said  he,  in  discussing  the  subject, 
"that  I  would  pay  those  losses  had  I  to  do  it  again.  The 
men  were  ungrateful  in  almost  every  instance.  As  a  prac- 
tice to  be  followed  in  trade  I  have  no  hesitation  in  con- 
demning it.  It  is  bad  for  the  broker  and  bad  for  his 
client." 

The  honest  and  capable  broker  wants  to  have  his  client 
make  money.  A  successful  following  is  the  best  advertise- 
ment a  broker  can  have.  He  will  try  to  advise  his  clients 
so  that  they  will  make  money.  His  advisory  attitude  to 
his  client  will  be  determined  by  the  mental  and  financial 
capabilities  of  his  client  and  the  latter^s  attitude  to  the 
market  and  particular  stocks. 


114  THE     ABC     OF     STOCK    SPECULATION". 


CHAPTER  XXIV. 
The  Bucket  Shop. 

A  bucket  shop  is  a  place  where  bets  can  be  made  on  thg 
advance  or  decline  of  stocks.  The  bettor  deposits  his  mar- 
gin, which  may  be  1  to  10  per  cent.,  and  "buys"  or  "sells" 
a  specified  stock.  The  dealer  accepts  the  margin  and  nom- 
inally "buys"  or  "sells"  the  stock  in  question.  There  is 
no  actual  sale  or  purchase,  as  the  dealer  simply  "buckets" 
the  order,  which  is  to  say,  that  he  agrees  to  pay  any  losses 
that  he  may  sustain  should  his  customer  make  a  winning 
wager,  and  on  the  other  hand  if  the  customer  loses,  the 
dealer  or  bucket  shop  operator,  profits  by  the  exact  amount 
of  the  bettor's  loss. 

The  theory  of  the  bucket  shop  operator  is  that  four 
speculators  out  of  five,  and  even  a  greater  percentage,  lose 
money  in  the  long  run  if  they  become  steady  traders.  They 
aim  to  obtain  the  money  thus  lost,  and  are  willing  to  back 
their  belief  that  the  stock  market  is  "unbeatable,"  by  the 
average  speculator. 

Bucket  shops  have  been  engaged  in  business  for  more 
than  twenty-five  years.  Many  unsuccessful  attempts  have 
been  made  to  suppress  them.  Since  their  early  days  the 
bucket  shop  system  has  expanded  to  tremendous  limits; 
in  the  aggregate  a  large  sum  of  money  is  invested  in  the 
trade,  and  the  statement  that  millions  of  dollars  are  an- 


THE     ABC     OF     STOCK     SPECULATION.  115 

nually  lost  and  won  in  this  form  of  stock  gambling  is 
moderate  and  conservative.  Twenty  years  ago  the  only 
important  bucket  shop  in  Wall  Street  and  New  York  was 
that  of  Louis  Todd,  a  New  England  man,  who  conducted  a 
large  establishment  at  44  Broad,  which  extended  through 
to  and  had  an  entrance  on  New  Street.  Hundreds  of  im- 
pecunious, broken  down  speculators  and  clerks  gambled 
there,  and  Todd,  the  backer  of  the  game,  waxed  fat  and. 
rich,  building  two  Broadway  hotels — the  Marlborough  and 
Vendome — on  part  of  his  profits.  When  he  became  a 
millionaire  he  retired  from  business.  In  the  meantime, 
dozens  of  little  bucket  shops  sprung  up  in  lower  New 
Street,  until  certain  buildings  in  that  neighborhood  were 
regarded  as  little  better  than  pest  holes  by  the  Wall  Street 
community.  Those  bucket  shops  were  conducted  by  cheap 
gamblers  who,  after  running  a  week,  would  fail,  the  pro- 
prietor closing  the  doors  and  absconding  with  the  money, 
while  the  "customers"  were  out  the  amount  of  their  ven- 
tures. In  a  week  or  two  the  defaulting  bucket  shop  oper- 
ator would  have  no  hesitation  in  resuming  business  in 
another  office  under  another  name.  There  may  have  been 
occasional  honest  failures,  where  the  bank  account  was 
legitimately  lost  to  the  concern's  bettors,  but  they  were 
very  few.  Except  at  rare  intervals  those  engaged  in  this 
trade  have  never  been  disturbed.  Dishonest  failures  are 
so  frequent  that  it  seems  strange  that  the  criminal  law  is 
not  more  actively  engaged  in  punishing  those  so  plainly 
employed  in  this  form  of  robbery. 

Since   1890   the  bucket  shop  system  has  advanced  to 
such  an  extent  that  it  now  plays  a  very  important  part  in 


116  THE     ABC     OF     STOCK     SPECULATION. 

the  trade  of  stock  speculation.     It  has  been  perfected  so 
that  many  speculators  are  unable  to  distinguish  the  legi- 
timate from  the  illegitimate  firm  and  is  now  closely  inter- 
woven with  stock  speculation  wherever  it  exists. 
There  are  bucket  shops  of  the  following  types: 

(1)  One  which  caters  to  a  local  trade  on  a  limited 
capital. 

(2)  One  which  poses  as  a  banking  firm,  advertising 
extensively,  has  no  Exchange  memberships,  and  seeks  a 
local  mail  order  and  private  wire  trade  with  the  large 
cities. 

(3)  One  which  operates  and  holds  an  Exchange  mem- 
bership. 

(4)  One  which  operates  a  private  wire  system,  but  has 
no  local  trade,  and  depends  for  profits  on  the  losses  of 
country  town  investors. 

(5)  An  outwardly  respectable  firm  which  buckets  its 
trade  when  necessity  arises. 

The  bucket  shop  represented  by  the  first  type  is  con- 
ducted by  men  of  no  responsibility.  It  will  open  with 
a  cash  capital  of  $100,  $1,000  or  nothing  at  all  if  the 
operator  is  desperate.  It  will  remain  open  just  so  long 
as  bettors  lose  money  to  it,  for  the  operators  rarely  re- 
main long  enough  to  pay  out  all  the  margins  that  have 
been  deposited.  The  favorite  lot  traded  in  is  one  of  5 
shares,  while  ten  share  trades  are  the  limit.  Margins  of 
1  per  cent,  are  required  and  2  per  cent,  is  usually  the 
limit.  The  commission  is  Yg  or  l^.  When  margins  are 
about  to  be  exhausted,  the  bettor  can  remargin  his  venture 
if  he  so  elects. 


THE     ABC     OF     STOCK     SPECULATION".  117 

From  1896  to  1903,  owing  to  the  advancing  market, 
there  were  many  large  failures  of  bucket  shops  transact- 
ing business  in  the  group  designated  as  type  Ko.  2.  There 
are  many  in  operation  to-day,  and  in  the  number  there 
are  several  which  are  very  strong  financially.  Their  cus- 
tomers are  pleased  with  their  methods  and  are  unable  to 
distinguish  them  from  legitimate  firms.  They  maintain 
elaborate  offices,  they  spend  thousands  of  dollars  in  adver- 
tising and  disseminate  expensive  books  and  pamphlets  to 
prospective  losers. 

In  group  3  are  found  bucket  shops  which  consider  that 
an  Exchange  membership  cloak  is  a  valuable  asset  in  ob- 
taining business.  They  are  the  concerns  which  "match 
orders"  on  an  exchange  and  consider  themselves  to  be 
somewhat  better  than  their  competitors. 

The  private  wire  bucket  shop  has  a  central  office  in 
Wall  Street.  It  leases  a  system  of  private  wires,  trans- 
mits quotations  and  employs  agents  on  a  profit  sharing 
or  salary  basis.  Usually  the  identity  of  the  owner  or 
backers  is  concealed  under  such  a  title,  as  for  example. 
The  New  York  Stock  Commission  Co.  At  times  they 
employ  as  many  as  a  dozen  telegraph  operators  and  deal 
not  only  in  stocks,  but  also  in  grain  and  cotton.  Members 
of  this  group  are  believed  to  have  conducted  highly 
profitable  operations.  Their  customers  are  inexperienced, 
and  the  out-of-town  speculator  is  regarded  in  this  trade 
as  a  swift  loser. 

Those  included  in  group  5  will  resent  the  indignity,  as 
they  can  hardly  be  classed  as  bucket  shops,  although  re- 
sorting to  bucket  shop  methods  when  the  financial  sky 


118  THE     ABC     OF     STOCK   SPECULATION. 

threatens  disaster.  Firms  in  this  class  are  Exchange 
members.  The  members  of  such  a  firm  may  be  carrying  a 
large  line  of  stocks.  A  decline  is  inevitable.  The  firm 
requests  its  customers  to  liquidate  and  the  advice  is  un- 
heeded ;  on  the  contrary  the  speculators  may  insist  on  buy- 
ing more  stocks.  In  order  to  escape  the  fury  of  the  storm, 
the  firm  decides  to  jettison  part  of  the  cargo,  and  so  with 
self-preservation  in  view,  rather  than  assume  further  risks, 
the  firm  sells  part  or  all  of  its  customers'  line  of  stocks, 
and  stands  in  the  position  of  having  "bucketed"  its  cus- 
tomers' accounts.  As  soon,  however,  as  the  storm  has 
passed,  they  are  rebought.  The  brokers,  it  is  true,  have 
profited  by  their  customers'  losses.  All  the  rules  govern- 
ing Exchange  trading  are  complied  with  in  this  operation, 
for  when  the  stocks  were  sold,  they  were  sold  for  the  indi- 
vidual account  of  one  of  the  members  of  the  firm  and 
stand  as  a  short  sale,  for  which  he  or  the  firm  is  respon- 
sible on  the  books.  Money  made  is  credited  to  this  ac- 
count just  as  money  lost  is  debited.  The  broker  simply 
wagers  that  his  customers  will  lose,  and  rather  than  jeopar- 
dize his  own  position,  he  pursues  this  course.  When  you 
read  that  a  brokerage  concern  has  failed  because  its  cus- 
tomers did  not  respond  to  "margin  calls,"  you  will  know 
that  the  suspended  firm  succumbed  to  the  conditions 
which  the  "bucketing"  broker  wished  to  avoid  when  he 
sold  his  customers'  stocks. 

The  bucket  shop  appeals  to  several  speculators,  notably 

(1)  The   small   trader  whose  account  is   refused  by 
legitimate  concerns; 

(2)  The  trader  who  believes  that  he  can  more  advan- 


THE     ABC     OF     STOCK     SPECULATION.  119 

tageoiisly  trade  on  board  quotations  than  on  open  market 
quotations,  and 

(3)  The  trader  who  deals  in  a  bucket  shop  rather  than 
in  the  New  York  market  by  mail  or  telegraph  order. 

The  small  speculators  supply  the  bulk  of  the  bucket 
shop  profits.  Speculators  of  the  second  class  are  in  error 
for  the  dealer  overcomes  his  seeming  advantage  with  tricks 
peculiar  to  the  trade.  Those  in  group  3  would  be  richer  in 
pocket  if  they  refrained  absolutely  from  trading. 

Some  of  the  theories  and  views  of  bucket  shop  operators 
are: 

That  $5,000  is  sufficient  capital  with  which  to  open  for 
business. 

That  four  out  of  five  speculators  lose  money  in  stock 
speculation  and  that  the  steady  player  is  sure  to  lose. 

That  the  most  certain  losers  are  the  small  speculators, 
and  those  who  operate  on  a  margin. 

That  the  smaller  the  margin  the  greater  the  chance  of 
loss  by  the  speculator,  hence  the  preference  for  small  mar- 
gins. 

That  to  encourage  a  speculator  to  pyramid  on  his  suc- 
cess and  enlarge  the  scope  of  his  transactions  is  to  win 
all  his  money  in  the  long  run. 

That  it  is  policy  to  pay  out  winnings  promptly  to  new 
customers,  who  once  satisfied  of  financial  responsibility 
are  forever  after  credulous. 

That  speculators  rarely  draw  down  their  profits,  but 
persist  invariably  in  wanting  more,  and  in  this  fact  exists 
the  bucket  shop  operators'  safety. 

"Of   course,"   explained   a    bucket   shop   broker   to   the 


130  THE     ABC     OF     STOCK     SPECULATION. 

writer,  "this  is  a  gambling  game.  There  are  thousands 
of  tricks  to  it.  The  average  speculator  is  a  fool  in  believ- 
ing that  he  can  guess  a  game  which  he  knows  nothing 
about.  For  example,  suppose  a  large  bucket  shop  has 
persuaded  its  customers  to  buy  in  the  aggregate  10,000 
shares  of  Sugar  on  small  margins.  It  is  short  just  that 
much  on  the  books.  The  operator  will  then  make  a  play 
in  the  open  market.  He  will  send  in  a  broker  he  employs 
to  the  Sugar  crowd,  and  there  are  times  when  he  has  his 
own  representative  on  the  Exchange,  to  sell  the  market 
off  a  couple  of  points  in  order  to  wipe  out  his  customers' 
accounts.  He  is  willing  to  lose  $1,000  to  make  $10,000. 
This  has  been  done  many  times.  And  then  again,  I  have 
known  clever  adventurers  to  work  precisely  the  same  game 
with  the  bucket  shops.  They  have  planted  orders  in  all 
the  bucket  shops  and  then  have  hastily  manipulated  the 
stock  market  to  successfully  execute  a  heavy  winning 
play. 

"When  Gov.  Flower  died  in  1899,  there  was  hardly  a 
solvent  bucket  shop  in  the  country.  They  had  paid  out 
all  their  own  capital,  and  all  their  customers'  margins, 
and  millions  more  were  liabilities  on  their  books.  Had 
their  customers  made  a  concerted  demand  for  their  money, 
not  one  could  have  kept  its  doors  open.  The  smash  came 
and  in  one  day  every  bucket  shop  account  was  wiped  out; 
the  operators  had  all  the  money,  and  they  started  afresh 
without  a  liability. 

"In  conducting  a  large  bucket  shop,  it  is  almost  impos- 
sible to  make  a  big  winning  on  a  bull  market  such  as  the 
one  of  recent  years.     Almost  all  bucket  shop  traders  are 


THE     ABC     OF     STOCK     SPECULATION.  121 

bulls.  In  a  rapidly  shifting  two-sided  market  with  broad 
fluctuations,  the  bucket  shop  will  always  reap  a  harvest. 
The  bucket  shop  has  no  use  for  customers  who  trade  and 
take  small  losses  and  attempt  to  scalp  the  market.  They 
want  speculators  who  will  ^guess'  the  market  for  'big 
money/  the  fellows  who  'buy  'em  when  they  are  strong 
and  sell  'em  when  they  are  weak.' 

"There  are  concerns  engaged  in  the  business  of  bucket- 
ing trade  who  have  never  been  suspected  of  such  a  thing 
and  so  elaborate  are  their  precautions  that  they  will  never 
be  suspected.  With  an  abundance  of  capital  and  knowl- 
edge of  the  business,  a  bucket  shop  operator  knows  that  he 
stands  behind  one  of  the  best  money-making  gambling 
institutions  in  the  country. 

"When  a  bucket  shop  secures  an  undesirable  customer — 
one  who  can  make  money — it  will  try  to  freeze  him  out. 
A  few  years  ago  $5,000  was  regarded  as  a  fair  amount  of 
cash  with  which  to  embark  in  this  trade.  To-day  the 
amount  required  is  larger.  A  bucket  shop  starting  with 
$100,000  will  pay  out  to  its  backers  as  dividends  the  first 
$100,000  that  comes  in  the  office  and  trust  to  luck  to  con- 
tinue in  business  on  the  margins  of  its  customers.  Should 
this  plan  'go  wrong,'  the  custom  is  to  assess  the  backers  of 
the  game,  and  if  an  assessment  plan  is  rejected  by  them, 
the  bucket  shop  suspends  or  'welches'  as  you  please  to  call 
it.  One  of  the  singular  things  about  the  bucket  shop 
speculators  is  that  as  a  class  they  will  return  and  do  busi- 
ness with  a  concern  which  has  failed  and  resumed. 

"Experience  teaches  a  bucket  shop  operator  that  the 
average  speculator  will  play  the  game  in  this  way :    He  is 


122  THE     ABC     OF     STOCK     SPECULATION. 

a  bull  and  buys  stocks.  He  is  successful  and  runs  $100 
into  $1,000.  He  then  writes  for,  or  demands  in  person, 
his  principal  and  profits.  The  money  is  promptly  paid. 
The  successful  speculator  then  concludes  that  the  firm 
is  financially  sound.  He  believes  that  he  is  the  one  man 
in  1,000  who  can  call  the  turns  of  the  market.  Fortune 
is  in  his  grasp.  Success  makes  him  conceited,  less  careful 
and  more  daring.  He  returns  the  $1,000  and  possibly 
more.  He  may  interest  one  or  two  friends  to  try  the  same 
rapid  road  to  fortune.  He  resumes  trading  on  the  bull 
side. 

"Giving  him  the  best  luck  possible,  we  find  that  he  has 
increased  his  $1,009  to  $2,000.  The  chances  are  that  he 
is  now  overtrading,  or  scattered  all  over  the  board — trad- 
ing in  too  many  stocks — and  so  extended  that  any  sharp 
set  back  in  the  market  will  wipe  him  out.  Along  comes 
an  unfavorable  development.  The  market  breaks  1,  2,  3, 
4  or  5  points  and  our  speculating  country  customer  is 
wiped  out. 

"The  lesson  does  not  prove  to  be  a  valuable  one.  The 
speculator  trys  again.  He  has  abandoned  his  idea  that 
he  is  going  to  make  a  fortune.  He  now  humbly  aspires 
to  "get  even,''  or  in  other  words,  to  recover  his  lost 
money.  In  the  attempt  to  "get  even,"  he  loses  more 
money,  and  then  sensibly  quits  gambling  in  stocks  or  be- 
comes a  confirmed  ^piker'  and  a  victim  of  the  gambling 
habit.  Once  acquired  by  a  poor  man,  it  is  as  hard  to  shake 
off  as  a  taste  for  strong  drink.  It  will  pauperize  him  and 
make  it  almost  impossible  for  him  to  take  up  genuine 
work  and  become  a  useful  citizen  in  the  community." 


THE     ABC     OF    STOCK    SPECULATION.  123 

The  bucket  shop  speculator  injures  his  own  chances  of 
success  the  very  minute  that  he  gives  an  order.  Supply 
and  demand  are  the  basic  factors  influencing  the  price  of 
stocks.  When  demand  exceeds  supply,  prices  advance  and 
opposite  conditions  result  in  declines.  The  bucket  shop 
purchase  is  shorn  of  power  to  influence  prices,  for  the 
order  has  not  been  executed  in  the  open  market.  Assum- 
ing that  50,000  shares  of  stocks  are  bought  in  the  bucket 
shops  of  the  United  States  in  a  single  day — and  the  esti- 
mate is  conservative — it  will  be  observed  that  this  buying 
power  is  absolutely  a  negative  factor  in  influencing  en- 
hancement of  stock  values  which  would  mean  profit  to  the 
speculative  buyers.  On  the  other  hand,  such  a  buying  de- 
mand, with  the  orders  actually  executed  on  the  floor  of  the 
Stock  Exchange,  would  at  times  stimulate  an  advance, 
check  a  decline  or  exert  an  otherwise  important  influence. 
It  will  therefore  be  perceived  that  the  bucket  shop  specu- 
lator is  a  force  arrayed  against  himself;  that  he  enters  the 
game  with  many  handicaps  and  penalizes  himself  by  re- 
ducing his  venture  to  a  wholly  negative  value  as  a  price 
maker. 

It  has  been  argued  that  precisely  the  same  conditions 
prevail  with  orders  executed  on  the  Consolidated  Exchange, 
but  this  is  an  erroneous  view,  for  in  all  such  transactions 
the  actual  delivery  of  stock  balances  is  contemplated  and 
made.  Where  there  remains  at  the  expiration  of  any  day 
or  week  a  balance  to  be  received  or  delivered  in  stocks, 
and  the  stocks  are  not  available  on  the  Consolidated  Ex- 
change, then  its  brokers  resort  to  the  primary  market — 
the  Stock  Exchange — and  purchase  any  stocks  that  may  be 


124  THE     ABC     OP     STOCK     SPECULATION. 

required  to  balance  their  accounts,  or  sell  if  the  circum- 
stances call  for  sales. 

The  writer  has  heard  occasionally  of  individuals  who 
have  made  winnings  in  bucket  shops.  He  has  never  heard 
of  any  man  who  became  rich  as  a  bucket  shop  speculator 
or  even  had  the  colnmon  sense  to  take  down  substantial 
winnings  and  retire  from  the  contest.  While  conceding 
that  there  are  times  when  the  purchase  or  sale  of  stocks, 
even  in  a  bucket  shop,  results  in  profit  to  the  speculator, 
an  examination  of  bucket  shop  accounts  shows  conclusively 
that  in  the  long  run  the  bucket  shop  speculator  is  certain 
to  become  bankrupt;  while  they  are  also  suggestive  of  the 
belief  that  the  average  bucket  shop  speculator  fails  to  un- 
derstand the  first  principles  of  the  game. 

A  contemporary  writer  says:  "The  large  number  of 
gambling  places  in  the  country  known  as  bucket  shops, 
with  their  frequent  failures  and  resultant  disclosure  of 
their  unscrupulous  methods,  yet  with  a  train  of  victims 
which  seemingly  is  larger  after  each  new  exposure,  is  caus- 
ing a  great  deal  of  moralizing  these  days,  provoking  trou- 
bled inquiry  whether  the  American  people  are  more  fool- 
ish and  ignorant  than  they  are  usually  thought  to  be,  and 
whether  this  folly  and  ignorance  is  growing. 

"There  is  no  doubt  that  among  the  customers  of  these 
bucket  shops  there  are  many  of  the  gullible  sort  who  spend 
their  lives  and  what  little  cash  resources  they  possess  in 
attempting  to  extract  wealth  from  one  visionary  project 
after  another.  But  the  fundamental  reason  why  bucket 
shops  flourish  is  that  the  American  people  as  a  people  are 
irresistibly  fond  of  financial  speculation.    While  our  coun- 


THE     ABC     OF     STOCK     SPECULATION.  125 

trymen  can  in  no  wise  be  called  a  nation  of  gamblers^  and 
while  great  speculative  manias,  such  as  the  South  Sea  bub- 
ble, the  John  Law  scheme,  or  the  tulip  craze  have  never 
possessed  the  whole  country,  as  each  in  turn  swept  over 
parts  of  Europe  in  the  last  two  centuries,  there  exists 
a  strong  element  in  our  national  character  wherein  the 
love  of  venture  and  the  dominance  of  a  lively  imagination 
hold  full  sway.  This  tendency,  of  course,  is  most  notice- 
able in  a  period  of  great  prosperity  like  that  which  so  hap- 
pily exists  at  present;  and  the  most  natural  direction  of 
this  manifestation  is  in  the  shares  of  the  great  railway  and 
industrial  corporations  through  which  the  country's  pros- 
perity chiefly  pulsates. 

"The  bucket  shop  offers  the  readiest  road  of  speculation. 
The  man  in  a  country  village  who  would  hesitate  to  put 
$10  upon  a  roulette  wheel  would  willingly  buy  ten  shares 
of  a  railway  stock  in  the  office  of  one  of  the  numerous 
'investment  companies'  or  bucket  shops  of  similar  high 
names  which  are  located  in  his  town.  Stock  speculation 
through  the  regular  channels  of  a  Stock  Exchange  house 
is  costly  and  complicated.  The  commissions  and  interest 
charges  are  large  and  most  of  these  houses  do  not  care  to 
accept  small  amounts  or  to  deal  in  less  than  one  hundred 
shares  of  stock,  save  for  very  well-known  customers.  It 
is  carried  on  with  difficulty  by  a  speculator  living  in  a 
small  town  where  he  does  not  have  frequent  access  to  mar- 
ket reports.  And  the  customer  of  a  Stock  Exchange  house 
may,  if  the  market  goes  heavily  against  him,  lose  not  only 
the  margin  of  his  investment,  but  find  himself  heavily  in 
debt  to  his  broker  besides. 


126  THE     ABC     OF     STOCK     SPECULATION. 

"Bucket  shops  do  business  on  a  very  different  principle. 
They  neither  buy  nor  sell  the  stocks  upon  orders  given  to 
them  by  their  customers,  and  in  very  many  instances 
they  make  no  pretence  of  assuming  to  do  this,  nor  do  their 
customers  have  any  idea  that  their  "orders"  to  buy  and  sell 
are  obeyed.  Both  parties  to  the  operation  look  upon  it  in 
its  true  light  of  a  simple  bet  made  that  a  stock  quoted  upon 
the  New  York  Exchange  will  go  up  or  down  within  certain 
limits.  The  commission  charged  by  the  bucket  shop  keeper 
is  much  less  than  that  of  a  Stock  Exchange  firm.  The 
bucket  shop  man  is  willing  to  deal  in  very  small  lots  of 
stock,  accepting  very  small  margins.  He  charges  his  cus- 
tomer no  interest  for  the  money  which,  if  the  business 
was  done  in  the  usual  way,  would  have  to  be  borrowed  to 
pay  for  the  stocks  actually  purchased.  Moreover,  the 
bucket  shop  keeper  allows  his  customer  to  begin  or  close 
his  trade  at  a  definitive  quotation  as  it  appears  upon  the 
ticker  of  the  Stock  Exchange  operations,  and  he  closes 
the  customer's  account  instantly  upon  the  exhaustion  of 
the  margin,  so  that  the  customer  is  assured  that  no  fur- 
ther claim  is  to  be  made  upon  him  in  case  the  market 
still  continues  to  go  against  him.  The  bucket  shop  keeper 
however,  for  his  part,  often  declines  to  allow  an  accumtt- 
lated  profil:  in  certain  stocks  to  run  beyond  a  certain  figure, 
and  he  generally  is  willing  to  deal  in  but  small  lots  of 
stock.  His  whole  system  of  doing  business  is  one  which 
presents  very  great  inducements  to  the  small  speculator, 
and  if  these  inducements  could  be  offered  by  any  respon- 
sible house  having  a  membership  in  the  Stock  Exchange, 
that  house  would  very  soon  have  a  monopoly  of  speculative 


THE     ABC     OF     STOCK     SPECULATION.  127 

operations  conducted  by  the  outside  public  in  Wall  Street. 
"Where,  then,  does  the  bucket  shop  keeper  make  his 
money?  In  this  simply,  that,  as  his  operations  are,  in 
reality,  those  of  a  series  of  bets  with  his  customers,  the 
bets,  so  far  as  the  customers  are  concerned,  taking  the  form 
of  guesses  as  to  which  way  the  stock  market  will  go,  ex- 
perience has  demonstrated  that  such  guesses  of  the  general 
run  of  people  are  in  the  main  incorrect  and  that  there  is  a 
steady,  average  profit  to  be  had  in  miscellaneously  accept- 
ing, or  as  the  slang  of  Wall  Street  has  it,  'coppering' 
them.  As  most  of  the  outsiders  are  'lambs,'  as  they  are 
called  in  Wall  Street,  they  buy  stocks,  rather  than  sell 
them,  so  that  the  customers  of  bucket  shops  find  their 
greatest  profit  and  the  keeper  of  the  concern  his  greatest 
loss,  in  periods  of  prosperity  and  advancing  markets  such 
as  we  have  just  seen.  Then  if  the  bucket  shop  man  is  a 
dishonest  individual,  as  he  usually  is,  he  finds  it  convenient 
to  fail  at  the  proper  time,  sweeping  into  his  own  pockets 
all  the  margins  and  paper  profits  of  his  patrons.  Many 
of  these  patrons,  indeed,  are  very  far  from  being  inno- 
cent and  unsuspecting  lambs.  They  have  no  illusions  on 
the  score  of  the  game  they  are  playing,  and  they  know 
that  the  bucket  shop  keeper  is  probably  a  pretty  'crooked' 
person.  They  are  apt  to  belong  to  that  unhappy  class  of 
individuals  known  as  the  'ghosts'  of  Wall  Street,  that  is, 
men  who  once  did  business  there  on  a  large  scale,  but 
have  lost  the  money  they  won  and  are  forced  to  gamble,  if 
they  gamble  at  all  in  a  very  humble  way.  The  question, 
on  which  these  men  concentrate  most  of  their  attention  is 
the  possibility  of  the  bucket  shop  failing,  and  after  a  pro- 


128  THE     ABC     OF     STOCK     SPECULATION'. 

longed  'bulF  market  when  they  know  that  the  proprietor 
of  the  concern  is  probably  losing  heavily,  they  take  their 
profits  in  cash,  if  they  have  any,  and  beware  the  shop  as  a 
very  dangerous  locality. 

"It  is  very  clear,  therefore,  that  the  business  of  trying  to 
speculate  by  means  of  bucket  shops  is  an  extremely  hazard- 
ous thing.  If  man  feels  he  must  speculate,  he  ought 
to  become  a  customer  of  a  house  having  membership  in  the 
Stock  or  Consolidated  Exchanges.  And  it  is  still  as  true 
as  it  ever  was  that  the  best  way  to  make  money  is  not  to 
speculate  at  all." 


THE     ABC     OF     STOCK     SPECULATION.  129 


CHAPTER  XXV. 

The   Speculator   and   the    Consolidated   Exchange. 

The  speculator  should  have  a  clear  idea  of  the  Consoli- 
dated Exchange,  its  advantages  and  disadvantages  and  rela- 
tion to  the  Stock  Exchange.  This  is  necessary  inasmuch 
as  the  Consolidated  Exchange  has  at  times  afforded  a  mar- 
ket for  many  thousand  small  speculators  in  stocks,  particu- 
larly those  living  out  of  town.  The  Consolidated  Exchange 
is  generally  advertised  as  the  "N.  Y.  Con.  Stock  Ex- 
change." It  is  a  consolidation  of  a  mining  exchange  and 
an  oil  exchange.  In  the  '70's  and  '80's  it  was  the  scene 
of  violent  speculation  in  mining  stocks,  and  certificates 
representing  crude  oil  in  lots  of  1,000  barrels.  Accom- 
panying the  decline  of  speculation  in  mining  shares  and 
oil  certificates,  the  members  decided  to  trade  in  the  active 
stocks  dealt  in  on  the  Stock  Exchange.  To-day  the  trad- 
ing in  mining  shares  is  on  a  nominal  basis  only,  while 
the  pipe  line  certificate  as  a  speculative  factor  has  been 
entirely  eliminated,  hence  the  name  New  York  Consoli- 
dated Stock  and  Petroleum  Exchange  is  a  misnomer,  and 
the  substitution  of  the  assumed  title — "N.  Y.  Con.  Stock 
Exchange."  Almost  the  entire  floor  of  the  Consolidated 
Exchange  is  now  devoted  to  dealing  in  Stock  Exchange 
shares.  In  the  main,  the  dealings  are  confined  to  frac- 
tured lots;  in  fact  the  bulk  of  the  trading  is  in  10  share- 


130  THE     ABC     OF     STOCK    SPECULATION. 

lots.  Certain  members  of  the  Consolidated  Exchange 
are  accustomed  to  say  that  their  Board  is  the  "primary 
market"  for  speculation  in  fractional  lots.  This  is  not  so. 
The  Stock  Exchange  is  the  primary  market  for  the  sale  of 
each  and  every  stock  dealt  in  thereon.  On  its  quotations, 
questions  before  courts  of  law  are  decided  and  its  prices  are 
recognized  as  official  in  any  legal  dispute  involving  the 
price  of  1  share  or  its  multiple.  Then  again,  inasmuch, 
as  it  is  impossible  to  deal  on  the  Consolidated  Exchange 
in  many  inactive  stocks  listed  on  the  Stock  Exchange,  the 
limitations  of  such  a  market  obviously  make  the  claim  to  a 
"primary  market"  absurd.  And  again,  it  is  possible  to 
conceive  of  the  complete  elimination  of  the  Consolidated 
Exchange,  without  thereby  affecting  investors,  speculators, 
or  those  corporate  interests  which  have  listed  their  se- 
curities on  the  Stock  Exchange  after  compliance  with  the 
rules  of  the  latter  institution. 

Whether  the  Consolidated  Exchange  is  or  is  not  a  useful 
public  institution  are  questions  which  will  not  be  an- 
swered here.  ^Membership  on  the  Consolidated  Excliange 
is  nominally  quoted  at  $2,500.  Stock  Exchange  member- 
ships (in  1902)  commanded  $83,000.  The  disparity  in 
values  is  also  calculated  to  cheapen  the  "primary  market" 
claim.  In  connection  with  the  Consolidated  Exchango 
there  have  been  many  scandalous  failures  in  which  credu- 
lous investors  have  in  the  aggregate  been  robbed  of  a  large 
amount  of  money.  Bucket  shops  have  secured  representa- 
tion in  the  institution,  and  the  later-day  management  has 
not  yet  been  able  to  overcome  the  corruption  which  was 
fostered  in  the  early  '^D's, 


THE     ABC     OF     STOCK     SPECULATION.  131 

Of  all  Consolidated  Exchange  assets  and  possessions  fig- 
uratively the  most  valual)le  is  the  "black-board."  This 
"black-board"  is  the  largest  in  the  country.  Its  length 
is  almost  that  of  a  city  block.  Two  men  are  employed 
from  10  A.  M.  to  3  P.  M.  to  post  thereon  the  quotations 
received  by  a  telegraph  operator  who  calls  them  oif  as  rap- 
idly as  they  are  received.  Where  the  quotations  come  from 
no  one  knows,  as  the  Stock  Exchange  does  not  recognize 
the  Consolidated  Exchange  and  would  not  permit  it  to 
use  the  official  prices  if  any  means  could  be  devised  to  ex- 
clusively hold  them.  It  is  reasonable  to  believe,  however, 
that  the  Consolidated  Exchange  has  at  some  remote  point 
secured  a  Stock  Exchange  ticker  or  connection  with  a 
telegraph  wire  on  which  Stock  Exchange  quotations  are 
transmitted.  There  are  two  stock  quotation  telegraph 
companies.  One  supplies  tickers  transmitting  quotations 
to  Stock  Exchange  members  exclusively.  That  is  the  fast- 
est ticker  service.  The  other,  and  slower  ticker,  by  per- 
haps one  or  two  minutes,  can  be  obtained  by  Consolidated 
Exchange  firms,  hotels  and  public  places  generally,  pro- 
vided two  members  of  the  Stock  Exchange  will  indorse 
the  application  of  the  person  who  wishes  to  rent  one  or 
more.  On  the  floor  of  the  Consolidated  Exchange  there 
are  two  of  the  slower  tickers  separated  from  and  apart 
from  the  blackboard.  Many  efforts  have  been  made  by 
the  Stock  Exchange  to  have  those  tickers  removed,  but  in 
the  legal  contests  resulting  from  such  attempts  the  Con- 
solidated Exchange  has  successfully  maintained  its  right 
to  possession  and  use.  How  the  two  tickers  on  the  Con- 
solidated Exchange  floor  are  used  by  the  members  will 


132  THE     ABC     OF     STOCK     SPECULATION-. 

hereafter  be  explained.  The  Consolidated  Exchange  has  a 
small  ticker  service  of  its  own,  but  to  it  no  particular  im- 
portance is  attached.  Now  Stock  Exchange  quotations  are 
also  received  by  Consolidated  Exchange  members  m  one 
other  way,  although  this  fact  is  not  generally  known,  and 
certainly  not  by  the  public.  It  requires  no  explanation  to 
understand  that  inasmuch  as  the  Consolidated  Exchange 
must  rely  on  its  two  slow  tickers  on  its  floor,  and  its  posted 
blackboard  quotations  which  are  slower  than  the  ticker 
(because  they  are  probably  transmitted  from  a  similar 
ticker)  that  the  speculator  who  can  get  Stock  Exchange 
prices  through  the  medium  of  the  fast  ticker  or  by  tele- 
phone from  the  floor  of  the  Stock  Exchange  can  trade  at 
a  substantial  advantage  over  his  competitors.  Taking  ad- 
vantage of  his  "quick"  prices  he  can,  when  there  is  a  broad 
market,  undersell  or  outbid  his  fellow  members  by  %'s,  14's 
or  even  full  points,  provided  they  are  dependent  on  the 
slower  quotation  facilities. 

Trading  on  the  Consolidated  Exchange  is  conducted  by 
the  following  dealers: 

(1)  The  legitimate  commission  firm  which  executes 
and  closes  out  its  customers'  transactions  without  departing 
from  the  recognized  rules. 

(2)  The  illegitimate  commission  firm,  which  is  in  fact 
a  bucket  shop,  and  which  evades  the  rules. 

(3)  The  speculator  who  trades  for  his  own  account  to 
save  commissions  and  expenses  that  trading  through  a 
Stock  Exchange  house  would  necessitate. 

(4)  The  room-trader  who  scalps  fractions  and  "evens 
up"  his  business  at  the  end  of  each  session. 


THE     ABC     OF     STOCK     SPECULATION.  133 

(5)  The  trader  who  relys  upon  quick  quotation  ser- 
vice in  order  to  make  profitable  ventures. 

(6)  The  arbitrage  trader  who  trades  between  the  New 
York,  Philadelphia  and  Boston  markets. 

(7)  The  broker  who  executes  orders  for  other  brokers. 
Total  membership  in  the  Consolidated  Exchange  is  lim- 
ited to  2,400  and  about  one-fifth  of  that  number  are  active 
members. 

Legitimate  commission  firms  are  not  few  and  transact 
a  very  respectable  volume  of  business.  Their  customers, 
as  a  rule,  are  10-share  traders,  although  many  firms  have 
customers  who  deal  in  100  share  lots  and  more.  Up  to 
1902  the  commission  charged  for  a  fractional  share  trade 
— 50  shares  or  under — was  1-16  of  1  per  cent,  or  one  half 
the  Stock  Exchange  commission,  but  the  rate  was  increased 
])y  vote  of  members  to  %  of  1  per  cent.,  thus  placing  the 
two  Boards  on  a  parity;  but  on  lots  of  50  shares  or  more 
the  charge  is  1-6  of  1  per  cent,  each  way  or  !/§  of  1  per. 
cent,  for  the  round  transaction.  In  the  three  or  four  most 
active  stocks  on  the  Consolidated  Exchange  the  commis- 
sion broker  contends  that  he  can  always  give  his  customer 
the  Stock  Exchange  price  or  one  approximating  it  %  or 
1/4  per  cent.  On  the  other  hand,  he  holds  that  the  frac- 
tional lot  trader — as  distinguished  from  the  100  share 
trader — is  at  a  disadvantage  on  the  Stock  Exchange  inas- 
much as  custom  compels  him  to  accept  or  pay  1/4,  i/^,  %,  1 
per  cent,  or  even  more  on  10  shares  as  it  is  offered  or 
bought.  There  are  also  times  when  he  can  give  his  cus- 
tomer the  advantage  of  fractions,  as  during  an  excited  ris- 
ing market  the   Consolidated   Exchange  prices   will  rise 


134  THE     ABC     OF     STOCK     SPECULATION. 

faster  than  those  on  the  Stock  Exchange,  but  it  is  obvious 
that  in  such  an  instance  that  which  works  to  the  advantage 
of  the  seller  must  be  the  disadvantage  of  the  buyer,  while 
the  proposition  is  exactly  reversed  if  the  speculation  is 
for  the  decline,  as  distinguished  from  the  rise.  The  Con- 
solidated Exchange  member  will  at  times  when  he  does 
not  find  a  broad  market  execute  large  orders  on  the  Stock 
Exchange  paying  the  regular  commission  of  %.  This 
latter  fact  proves  that  his  own  market  has  clearly  defined 
limitations  as  distinguished  from  the  primary  market,  and 
also  that  he  has  telephonic — almost  instantaneous — con- 
nection with  the  floor  of  the  Stock  Exchange.  The  fol- 
lowing conclusions  regarding  the  facilities  of  the  Consoli- 
dated Exchange  commission  firm  which  executes  its  orders 
are  fair: 

(1)  The  market  for  fractional  lots  in  the  favorite  and 
most  active  speculative  stocks  is  an  excellent  one  and  a 
trader  in  10  share  certificates  can  usually  buy  and  sell 
closer  to  Stock  Exchange  100  share  lot  prices  than  he  can 
on  the  Stock  Exchange  itself. 

(3)  The  market  for  large  blocks  of  stocks  is  too  nar- 
row for  traders  of  the  100  to  500  share  class. 

(3)  There  is  no  market,  or  at  least  only  a  nominal 
market  for  inactive  stocks.  Thus,  it  frequently  happens 
that  a  stock  will  become  the  center  of  speculative  activity 
on  the  Stock  Exchange.  If  it  is  maintained,  the  Consoli- 
dated Exchange  may  take  it  up  for  a  brief  period,  when 
with  a  cessation  of  activity  on  the  Stock  Exchange  hold- 
ings of  small  amounts  must  make  concessions  on  the  Con- 
solidated Exchange. 


THE     ABC     OF     STOCK     SPECULATIOIT.  135 

(4)  A  few  Consolidated  Exchange  houses  charge  6  per 
cent,  interest  throughout  the  year  from  the  day  of  pur- 
chase. Among  others  the  rate  is  usually  higher  than  the 
Stock  Exchange  rate.  During  the  period  when  the  weekly 
settlement  was  in  practice,  there  were  no  interest  carrying 
charges  for  stocks  from  Monday  until  Saturday.  Stocks 
carried  over  Saturday  also  carried  one  week's  interest. 
The  Exchange  having  unwisely  adopted  the  daily  clearing 
plan,  interest  is  charged  from  the  day  of  purchase.  The 
plan  of  clearing  stocks  is  identical  with  that  of  the  Stock 
Exchange — balances  in  stocks  are  received  and  delivered 
each  day. 

There  are  fewer  bucket  shops  on  the  Consolidated  Ex- 
change to-day  than  there  have  been  in  the  past.  Certain 
firms  of  this  description  find  that  they  can  secure  more 
business  through  an  Exchange  connection  than  without 
one.  Their  business  is  transacted  under  the  cloak  of  re- 
spectability. Such  a  house,  for  example,  receives  your 
order  to  buy  10  or  100  shares  of  stock.  It  employs  on 
the  Exchange  five  or  ten  brokers  as  necessity  may  require. 
The  order  to  buy  at  a  price  is  transmitted  over  the  tele- 
phone to  the  Exchange  and  at  the  same  time  an  order  to 
sell  at  the  same  price  is  also  transmitted.  The  two  brokers 
then  "come  together"  if  they  can  and  "match"  or  "bucket" 
the  order.  They  know  each  other  and  endeavor  to  trade 
with  each  other,  whenever  possible.  When  this  is  not 
possible  the  buying  and  selling  order  is  executed  as  near 
the  first  purchase  or  selling  price  as  the  market  will  permit. 
This  is  called  "getting  names."  Having  executed  such  a 
transaction,  the  firm  in  question  finds  itself  in  the  posi- 


136  THE    ABC     OF     STOCK    SPECULATION. 

tion  of  a  bucket  shop — it  has  no  liability  on  the  Exchange. 
If  the  customer  loses,  the  firm  takes  his  margin ;  if  the  cus- 
tomer wins,  the  firm  pays  the  loss.  Another  reason  for  this 
awkward  method  of  conducting  a  bucket  shop  is  that  a 
customer  of  an  Exchange  firm  can  demand  the  names  of 
the  brokers  to  his  transaction,  and  failing  to  get  them, 
could  complain  to  the  Exchange.  If  the  Exchange  de- 
manded them  and  they  were  not  furnished,  the  firm  would 
be  liable  to  expulsion  from  membership.  And  again,  the 
customer  might  insist  upon  the  return  of  money  lost  on 
the  plea  that  no  transaction  had  been  effected.  The  brok- 
ers executing  such  orders  comply  with  the  rules  to  all 
intents  and  purposes  and  the  details  of  the  complicated 
bookkeeping  involved  are  worked  out  with  great  ingenuity. 
The  business  of  this  character  on  the  Consolidated 
Exchange  has  reached  proportions  that  have  been  respon- 
sible for  much  complaint.  "Matched"  or  "bucketed"  or- 
ders injure  rather  than  help  an  exchange.  Others,  trading 
legitimately,  are  placed  at  a  disadvantage  and  the  value  of 
such  trade  is  best  represented  by  a  cipher.  The  speculator 
trading  through  such  a  firm  takes  serious  chances  on  its 
financial  responsibility,  although  a  half  dozen  of  them 
have  weathered  many  financial  storms.  In  closing  out 
trades  through  such  concerns,  the  customer  frequently  has 
to  accept  prices  that  are  wide  of  the  market,  and  when 
this  is  so,  the  broker  has  no  hesitation  in  placing  the  fault 
— ^not  with  himself — but  with  the  facilities  of  the  Ex- 
change which  enables  him  to  carry  on  his  trade. 

Young  men — and   older  ones — who  wish   to   speculate 
with  the  least  possible  expense  buy  Consolidated  Exchange 


THE     ABC     OF     STOCK     SPECULATION".  137 

memberships,  and  trade  for  their  own  account.  They  have 
retired  as  clerks  from  Stock  Exchange  houses,  are  sons 
of  Stock  Exchange  members  or  may  be  men  of  limited 
capital.  They  pay  nothing  in  commissions.  If  they  are 
"bears"  on  a  "bear"  market,  they  make  money  on  their 
commitments  by  "carrying"  stocks  for  the  interest  charges 
which  they  receive.  If  they  care  to  lend  money  on  stocks 
as  collateral,  they  can  average  6  per  cent,  or  better  through 
the  year,  owing  to  the  demand  from  brokers  with  small 
capital  to  have  their  stocks  "taken  up"  and  "carried"  by 
some  one  else. 

The  trader  is  a  speculator  of  the  same  type  as  the  one 
described  above.  He,  however,  closes  up  his  accounts  each 
day.  He  returns  to  his  home,  neither  "long"  nor  "short," 
and  says  that  he  sleeps  better  than  if  he  were  deep  in  the 
market.  He  trades  for  small  profits — and  small  losses. 
His  usual  loss  is  %  and  he  rarely  assumes  more  than  a  i/4 
loss.  He  has  made  a  study  of  the  demands  arising  from 
each  group  of  brokers  on  his  Exchange  and  he  can  usually 
"guess"  the  "next"  quotation"  instinctively.  He  lives  on 
the  money  lost  through  the  legitimate  commission  houses, 
or  his  fellow  traders  and  is  a  "gambler."  He  has  no  mar- 
ket opinions  and  simply  follows  the  two  Stock  Exchange 
tickers,  guided  by  the  volume  of  Stock  Exchange  transac- 
tions and  his  knowledge  of  the  same.  He  detests  the  bucket 
shop  firms  for  the  reason  that  when  they  match  their  or- 
ders it  means  that  less  money  will  be  lost  on  the  Exchange 
by  the  outside  public  than  if  the  orders  were  actually  trans- 
acted instead  of  "matched."  He  has  the  same  feeling 
toward  the  trader  who  relies  upon  quick  quotations. 


138  THE    ABC     OF     STOCK    SPECULATION. 

The  trader  who  relies  upon  quick  quotations  gets  them 
in  one  of  two  ways.  He  has  private  and  secret  telephone 
connection  with  a  fast  Stock  Exchange  ticker  or  with  a 
member  of  the  Stock  Exchange.  There  are  few  of  these 
"wires."  Such  a  broker  will  stand  in  a  crowd  and  receive 
"finger"  signals  from  the  telephone  boy  of  the  rise  and 
fall  of  prices  and  will  buy  or  sell  on  the  changes,  slightly 
in  advance  of  the  blackboard  and  ticker  quotations.  At 
times  traders  of  this  type — who  are  very  unpopular  with 
other  traders  on  the  ground  that  they  are  taking  an  unfair 
advantage — ^have  conducted  profitable  operations.  They 
operate  spasmodically,  for  a  "wire"  may  be  suddenly  dis- 
continued and  as  unexpectedly  open  up.  Other  traders 
who  have  not  the  advantage  of  these  special  facilities  try  to 
trail  behind  them.  The  work  itself  is  hard  on  the  nerves 
and  few  men  stand  it  very  long. 

There  are  Consolidated  Exchange  houses  which  affect  to 
transact  an  arbitrage  business  between  Xew  York,  Phila- 
delphia and  Boston.  They  do  not,  however,  appear  to 
make  very  earnest  bids  for  business  in  either  city.  The 
arbitrage  business  between  the  Consolidated  Exchange, 
Boston  and  Philadelphia  is  not  large  at  best.  There  are 
members  of  the  Consolidated  Exchange  who  say  that  they 
would  like  no  better  proposition  than  to  be  able  to  pay  for 
a  Stock  Exchange  membership,  put  a  representative  in  that 
institution  and  arbitrage  through  the  possession  of  supe- 
rior quotation  transmission  facilities  between  the  Consoli- 
dated and  Stock  Exchanges.  An  arbitrage  house,  such  as 
the  one  described,  must  own  at  least  several  Exchange 
memberships  and  command  comparatively  large  capital. 


THE     ABC     OF     STOCK     SPECULATION.  139 

The  risk  is  great,  for,  if  a  member  of  the  Stock  Exchange 
were  found  guilty  of  conducting  such  a  trade  he  would 
be  promptly  expelled  from  that  institution.  It  is  never- 
theless true  that  there  are  brokers  who  risk  their  reputa- 
tions in  this  way. 


140  THE    ABC     OF     STOCK     SPECULATION. 

CHAPTER  XXVI. 

The  Tipstee. 

The  novice  in  stock  speculation,  among  his  first  inqui- 
ries, before  making  ventures,  asks;  "Is  there  any 
information  that  I  can  buy  which  will  help  me  to  make 
profitable  deals?"  The  reply  is  in  the  negative,  without 
qualification.  There  are  two  types  of  tipsters  before  the 
public. 

(1)  The  advertising  tipster,  man  or  woman,  who  ad- 
vertises under  fictitious  names  or  assumes  pretentious 
"information  bureau"  titles,  and  offers  for  sale  advance 
information  regarding  stock  market  movements,  and, 

(2)  The  tipster  news  bureau  appealing  to  private  sub- 
scribers and  distinguished  from  the  first  group  only  by 
the  fact  that  it  does  not  advertise. 

The  tipster  is  a  comparatively  new  figure  in  Wall  Street. 
Ten  years  ago  he  would  have  been  an  impossibility.  The 
amazing  increase  in  wealth,  the  love  of  speculation  pecu- 
liar to  every  people  and  a  foolishly  credulous  public  com- 
bined to  open  a  field  for  the  adventurer.  His  development 
has  been  rapid.  Eeputable  newspapers  have  freely  sold 
him  their  advertising  columns.  The  United  States  Gov- 
ernment not  only  fails  to  prohibit  the  use  of  the  mails  to 
him  but  in  New  York  he  has  no  difficulty  in  renting  post- 
office  boxes,  and  transacting  business  from  a  post-office  box 


THE     ABC     OF     STOCK     SPECULATIOX.  1-41 

under  an  assumed  name.  Naturally  many  of  these  rogues 
had  no  wish  to  see  their  patrons,  and  so  they  were  safe- 
guarded by  their  post-office  box  connections,  which  ren- 
dered it  unnecessary  to  advertise  street  and  number  ad- 
dresses. This  in  itself  should  have  been  sufficient  to  warn 
sensible  persons  that  the  tipsters  were  disreputable  thieves, 
but,  strange  to  say,  individuals  and  so-called  "bureaus" 
at  times  obtained  as  many  as  1,500  subscribers  who  paid 
$5  and  $10  a  month  each  for  illiterate  market  letters. 

A  Brooklyn  youth  of  the  name  of  Miller,  employed  as 
a  tool  by  a  group  of  gamblers,  organized  on  paper,  what 
he  called  the  "Franklin  Syndicate."  With  the  aid  of 
shabby  stationery  and  advertising  from  a  2-story  frame 
house  in  a  remote  and  poor  section  of  Brooklyn,  this  young 
man  succeeded  in  collecting  more  than  $830,000  on  his 
simple  promise  that  he  had  discovered  a  successful  method 
of  speculating  in  the  stock  market  and  one  which  would 
enable  him  to  pay  his  clients  520  per  cent,  per  annum. 
He  was  exposed  as  a  fraud  by  the  daily  newspapers,  and 
sentenced  to  a  term  of  imprisonment  in  the  State  peni- 
tentiary, while  those  behind  him  succeeded  in  escaping  to 
Europe  with  the  bulk  of  the  money.  Men,  women  and 
children  were  among  Miller's  clients,  while,  curiously 
enough,  the  number  of  physicians  was  large.  The  desire 
to  gamble  at  this  time  (1900)  was  intense.  Many  per- 
sons confessed  that  they  knew  Miller  to  be  a  fraud  and 
that  he  could  not  honestly  keep  his  promise,  but  they  had 
hoped  to  be  among  the  early  investors  who  would  have 
received  all  their  original  capital  back  and  a  profit,  to, 
in  weekly  installments,  before  the  crash  arrived. 


142  THE     ABC     OF     STOCK     SPECDLATIOIT. 

Another  man  who  had  a  commonplace  Irish  name  and 
was  in  every  respect  a  most  commonplace  person,  adver- 
tised under  a  high-sounding  English  name  for  subscribers 
to  his  tips.  To  each  subscriber  he  sent  a  wonderful  tele- 
graphic code,  which  he  used  as  a  medium  in  telegraphing 
his  tips.  His  methods  were  so  original;  his  advertising  so 
specious,  and  the  gambling  fever  so  prevalent,  that  on  the 
eve  of  the  second  election  of  McKinley  he  had  1,500  to 
1,609  subscribers  to  his  so-called  "service."  He  notified 
his  subscribers  prior  to  Mr.  McKinley's  re-election  that 
stocks  were  a  "short  sale,"  as,  in  his  opinion,  Bryan  would 
be  the  victor  as  the  result  of  a  landslide.  His  subscribers 
were  compelled  on  the  election  of  the  Kepublican  candidate 
to  buy  back  their  commitments  at  figures  which  repre- 
sented losses,  and  the  wail  of  condemnation  was  so  great 
that  the  Irish  tipster  retired  from  the  field  with  from 
$75,000  to  $80,000  and  later  engaged  in  the  then  profitable 
business  of  selling  worthless  oil  stocks. 

Still  another  representative  of  this  type  was  the  man 
who  having  100  subscribers  advised  50  to  sell  a  certain  stock 
having  100  subscribers  advised  50  to  sell  a  certain  stock 
short  and  the  remaining  50  to  buy  the  same  stock.  If  50 
lost,  his  argument  was  that  50  had  Jo  win — an  erroneous 
deduction — but  he  did  not  experience  long  life  in  the 
trade. 

Another  type  included  "confidential  stenographers," 
"private  wire  telegraph  operators,"  and  "bookkeepers," 
who  advertised  inside  information  for  cash  in  advance. 
Some  of  the  tipsters  were  so  crude  and  fraudulent  in  their 
methods  that  their  advertisements  became  the  laughing 


THE     ABC     OF     STOCK    SPECULATION".  143 

stock  of  Wall  street  and  yet  many  persons  were  and  are 
to-day  deceived  by  them.  All  "information"  disseminated 
by  group  one  is  valueless.  It  is  nothing  more  nor  less 
than  haphazard  "guessing"  by  men  absolutely  lacking  in 
self-respect. 

Upon  one  occasion  a  Western  adventurer,  on  coming  to 
New  York,  was  exposed  in  the  newspaper  with  which  the 
writer  was  identified  as  a  member  of  its  financial  staff. 
He  called  with  a  letter  of  introduction  from  a  broker  and 
a  very  earnest  request  that  he  be  allowed  to  live  in  peace 
as  he  had  reformed  and  had  engaged  in  no  illegitimate 
business  since  his  arrival  in  Wall  Street.  He  had  been 
one  of  the  most  audacious  of  the  Western  men  who  coined 
money  from  "tip"  and  "discretionary  brokerage"  opera-, 
tions.  He  was  a  fine  looking,  amiable  fellow,  and  his  state- 
ments were  so  ingenuous,  and  his  letter  of  introduction  so 
strong  that  there  was  no  hesitancy  in  informing  him  that 
he  would  get  no  further  publicity  if  he  lived  up  to  his 
promises.  Profuse  in  his  thanks  he  was  about  to  depart 
when  the  writer  remarked  that  if  he  fancied  there  was 
any  obligation,  it  could  easily  be  repaid  by  imparting  some 
information  about  his  old  business. 

"There  is  very  little  to  tell,"  explained  the  tipster.  "It 
is  such  a  simple  proposition.  You  see  it  is  like  this:  As- 
sume that  I  offer  the  public  a  sound,  safe  and  absolutely 
reliable  6  per  cent,  investment  in  the  form  of  stocks  or 
bonds  for  sale.  I  could  advertise  it  through  the  news- 
papers or  through  the  mails  until  I  grew  gray-headed 
before  I  could  get  rid  of  it  to  small  investors — the  class 
with  which  we  do  business,  and  always,  preferably  the  man 


144  THE     ABC     OF     STOCK     SPECULATION. 

in  the  small  town  or  the  country.  But,  let  me  offer  the 
public  40,  50  or  100  per  cent.,  give  me  a.  good  start  and 
the  use  of  the  mails,  and  I  assure  you  that  I  would  have 
to  hire  a  wagon  in  which  to  cart  down  Broadway  my 
money-laden  mail.  Appeal  to  the  cupidity  of  the  small 
investor  and  you  can  get  his  money  and  in  no  other  way. 
And  I  don't  mind  telling  you  that  one  reason  why  I  have 
reformed  is  that  I  can  no  longer  use  the  mails,  having 
been  shut  out  by  order  of  the  authorities." 

In  less  than  nine  months  a  private  detective  who  oper- 
ates a  bureau  that  is  supposed  to  expose  frauds  called  on 
the  writer  and  made  the  statement  that  he  represented 
the  reformed  tipster  and  had  a  proposition  from  him.  He 
said :  "Mr. has  been  engaged  in  a  legitimate  broker- 
age business,  not  under  his  own  name,  but  with  another 
man.  It  is  a  discretionary  business,  'mail  order,'  and  no 
one  has  been  robbed.  Eeporters  have  told  him  that  he  is 
going  to  be  written  up  in  to-morrow's  paper.  I  will  pay 
you  $1,030  now  if  you  will  agree  to  stop  the  story." 

The  detective  was  requested  to  depart  and  invited  not  to 
call  again,  in  which  event  he  was  promised  that  he  too 
would  be  "written  up."  The  editor  of  the  newspaper  in- 
terested was  informed  of  the  proposition,  and  the  exposure 
was  published  the  following  day.  The  reformed  tipster 
defaulted  with  profits  estimated  to  exceed  $100,000  and 
two  "firms"  closed  up — (1)  the  "discretionary  pool"  bro- 
kerage house  he  directed  and  (2)  the  exchange  brokerage 
house  through  which  the  tipster  alleged  he  transacted  his 
orders.  The  money  was  secured  from  out-of-town  specu- 
lators on  promises  of  dividends  at  the  rate  of  40  per  cent. 


THE     ABC     OF     STOCK     SPECULATION.  145 

annually  and  which,  in  the  early  stages  of  the  game,  are 
always  paid  regularly. 

The  tipster  in  group  one  is  a  "guesser"  who  has  not  even 
the  advantages  possessed  by  a  first-class  brokerage  house. 
He  is  as  far  removed  from  the  avenues  that  lead  to  desir- 
able information  as  he  is  from  those  which  lead  to  Para- 
dise. 

It  is,  indeed,  a  great  pity  that  New  York  City  has  not 
produced  a  district  attorney  of  force  sufficient  to  break 
up  this  trade  and  bring  the  offenders  within  reach  of  the 
criminal  law. 

Type  two  is  a  somewhat  different  proposition.  Tipster 
bureaus  (called  news  bureaus)  must  be  differentiated  from 
the  two  excellent  news  bureaus*  which  supply  Wall  Street 
with  news.  The  most  charitable  thing  that  can  be  said 
about  them  is  that  they  do  the  best  they  can;  that  is  to 
say,  if  their  owners,  by  diligent  work,  gain  early  knowledge 
of  manipulation  in  stocks  they  do  not  fail  to  make  it 
known  to  their  subscribers.  They  are  also  employed  at 
times  by  manipulators,  through  the  distribution  of  "Puts" 
and  "Calls"  to  "boom"  certain  stocks  and  freely  delude 
their  subscribers  to  the  best  of  their  limited  ability.  It 
can  be  concluded  without  fear  of  contradiction  that  such 
information — as  is  all  stock  market  information — ^must  be 
very  dangerous  to  the  buyer. 

A  successful  broker,  watching  a  customer  reading  the 
market  letters  of  one  of  the  tipsters,  remarked:  "Why 
do  you  read  that  stuff?  Don't  you  know  that  to  follow 
that  fellow  regularly  a  trader  would  go  broke  if  he  had 
the  wealth  of  the  Bank  of  England  behind  him  ?" 

*Dow,  Jones  &  Co.,  and  the  New  York  News  Bureau. 


146  THE     ABC     OF     STOCK     SPECULATION. 

A  Hebrew  tipster,  who  has  a  considerable  following, 
upon  one  occasion  explained  his  business  and  his  follow- 
ing in  this  way:  "I  occupy  the  same  relation  to  the  stock 
market  that  the  doctor  does  to  the  patient.  I  diagnose  the 
case,  or  in  other  words,  with  20  years'  experience  and 
some  knowledge  of  speculation,  I  investigate  market  con- 
ditions and  draw  conclusions.  I  try  to  obtain  information 
whenever  I  can  get  it.  I  examine  the  fluctuations  and 
\^olume  of  trading  with  care  and  govern  myself  accord- 
ingly. I  am  at  my  office  early  and  late  studying  the  mar- 
ket. It  is  true  that  I  am  almost  always  a  bull.  All  my 
subscribers  are  bulls.  I  could  not  exist  without  them.  I 
never  predict  declines  unless  we  are  on  the  verge  of  a 
panic  or  a  bad  break.  If  I  think  that  a  certain  stock  will 
decline  I  advise  my  clients  to  'take  profits.'  Such  advice 
sounds  well.  I  rarely  advise  'short'  sales,  for  experience 
teaches  me  that  my  clients  will  not  make  them.  I  am 
always  positive — more  positive  when  I  am  in  doubt  than 
when  I  am  reasonably  certain.  No  man  can  succeed  in 
my  business  unless  he  is  positive.  Men  who  play  this 
game  want  to  follow  a  leader.  They  wish  to  be  told  to 
do  things.  They  know  that  they  cannot  rely  upon  theif 
own  judgment.  In  a  'bull'  market  I  can  do  better  for  them 
than  many  of  them  can  do  themselves.  Am  I  often 
wrong?  Yes.  But  I  overlook  my  errors  of  judgment,  as 
do  my  clients  in  constantly  directing  their  attention  and 
gaze  to  my  successful  tips.  If  a  man  wants  to  speculate 
let  him  do  so.  If  he  wants  to  buy  and  has  a  fancy,  advise 
him  as  he  wishes  to  be  advised.  If  he  buys  and  loses  he 
will  forget  and  forgive;  but,  if  you  advise  him  not  to 


THE    ABC     OF     STOCK     SPECULATION.  147 

make  the  venture  on  which  he  had  concentrated  his  mind, 
and  the  market  movement  favors  his  conception,  then  he 
will  never  forgive  you  for,  in  a  majority  of  cases,  he  will 
hold  you  responsible  for  the  loss  of  so  much  money.  The 
stock  speculative  public  is  constantly  changing.  Novices 
to-day  and  veterans  to-morrow.  'Flush'  this  year  and 
'broke'  the  next.  The  best  we  can  do  is  to  entertain  them 
while  they  are  here  and  try  to  give  them  a  run  for  their 
money." 

The  cheerful  humbug  responsible  for  the  above  views 
disposes  of  his  typewritten  opinions  for  in  round  figures 
about  $22,000  a  year.  That  buyers  are  to  be  found  for 
the  product  of  the  tipsters  does  not  speak  well  for  the 
intelligence  of  the  buyers.  Wall  Street  regards  them  with 
impatience  and  contempt  and  would  suppress  them  if  it 
could. 


148  THE    ABC     OF     STOCK    SPECULATION. 


CHAPTER  XXVIL 

Conclusions  of  a  Speculator. 

A  close  student*  of  speculation  in  all  its  forms  as  con- 
ducted on  the  exchanges  of  this  country  has  arrived  at 
the  following  conclusions,  which,  he  says,  in  application 
to  speculation  are  "universal  laws."  He  divides  his  con- 
clusions into  two  groups,  laws  absolute  and  laws  condi- 
tional. 

'Laws  absolute.  Never  overtrade.  To  take  an  interest- 
larger  than  the  capital  justifies  is  to  invite  disaster.  With 
such  an  interest,  a  fleutuation  in  the  market  unnerves  the 
operator,  and  his  judgment  becomes  worthless. 

1.  Never  'double  up";  that  is,  never  completely  and 
at  once  reverse  a  position.  Being  "long,"  for  instance,  do 
not  "sell  out"  and  go  as  much  "short."  This  may  occa- 
sionally succeed,  but  is  very  hazardous,  for  should  the 
market  begin  again  to  advance,  the  mind  reverts  to  itg 
original  opinion  and  the  speculator  "covers  up"  and  "goes 
long"  again.  Should  this  last  change  be  wrong,  complete 
demoralization  ensues.  The  change  in  the  original  posi- 
tion should  have  been  made  moderately,  cautiously,  thus 
keeping  the  judgment  clear  and  preserving  the  balance  of 
mind. 

2.  "Run  quick"  or  not  at  all ;  that  is  to  say,  act  prompt- 
ly at  the  first  aproach  of  danger,  but  failing  to  do  this 

♦  Financial  Record. 


THE     ABC     OP     STOCK     SPECULATION.  149 

until  others  see  the  danger  hold  on  or  close  out  part  of  the 
"interest." 

3.  Another  rule  is,  when  doubtful  reduce  the  amount 
of  the  interest ;  for  either  the  mind  is  not  satisfied  with  the 
position  taken,  or  the  interest  is  too  large  for  safety.  One 
man  told  another  that  he  could  not  sleep  on  account  of  his 
position  in  the  market;  his  friend  judiciously  and  lacon- 
ically replied:    "Sell  down  to  a  sleeping  point." 

Eules  conditional.  These  rules  are  subject  to  modifi- 
cation, according  to  the  circumstances,  individuality  and 
temperament  of  the  speculator. 

1.  It  is  better  to  "average  up"*than  to  "average  down.'' 
This  opinion  is  contrary  to  the  one  commonly  held  and 
acted  upon;  it  being  the  practice  to  buy  and  on  a  decline 
buy  more.  This  reduces  the  average.  Probably  four 
times  out  of  five  this  method  will  result  in  striking  a  re- 
action in  the  market  that  will  prevent  loss,  but  the  fifth 
time,  meeting  with  a  permanently  declining  market,  the 
operator  loses  his  head  and  closes  out,  making  a  heavy 
loss — a  loss  so  great  as  to  bring  complete  demoralization, 
often  ruin. 

But  "buying  up"  is  the  reverse  of  the  method  just  ex- 
plained ;  that  is  to  say,  buying  at  first  moderately  and  as 
the  market  advances  adding  slowly  and  cautiously  to  the 
"line."  This  is  a  way  of  speculating  that  requires  great 
care  and  watchfulness,  for  the  market  will  often  (prob- 
ably four  times  out  of  five)  react  to  the  point  of  "average." 
Here  lies  the  danger.  Failure  to  close  out  at  the  point  of 
average  destroys  the  safety  of  the  whole  operation.  Occa- 
sionally (probably  four  times  out  of  five)  a  permanently 

*Pyramiding. 


iSl)  THE     ABC     OF     STOCK     SPECULATION. 

advancing  market  is  met  with  and  a  big  profit  secured. 
In  snch  an  operation  the  original  risk  is  small,  the  danger 
at  no  time  great,  and  when  successful  the  profit  is  large. 
This  method  should  only  be  employed  when  an  important 
advance  or  decline  is  expected,  and  with  a  moderate  capi- 
tal can  be  undertaken  with  comparative  safety. 

2.  To  "buy  down"  requires  a  long  purse  and  a  strong 
nerve,  and  ruin  often  overtakes  those  who  have  both  nerve 
and  money.  The  stronger  the  nerve  the  more  probability 
of  staying  too  long.  There  is,  however,  a  class  of  success- 
ful operators  who  "buy  down"  and  hold  on.  They  deal  in 
relatively  small  amounts.  Entering  the  market  pru- 
dently with  the  determination  of  holding  on  for  a  long 
period,  they  are  not  disturbed  by  its  fluctuations.  They 
are  men  of  good  judgment,  who  buy  in  times  of  depression 
to  hold  for  a  general  revival  of  business — an  investing 
rather  than  a  speculating  class. 

3.  In  all  ordinary  circumstances  my  advice  would  be 
to  buy  at  once  an  amount  that  is  within  the  proper  limits 
of  capital,  etc.,  "selling  out"  at  a  loss  or  profit,  according 
to  judgment.  The  rule  is  to  stop  losses  and  let  profits  run. 
If  small  profits  are  taken,  then  small  losses  should  be 
taken.  Not  to  have  the  courage  to  accept  a  loss  and  to  be 
too  eager  to  take  a  profit,  is  fatal.    It  is  the  ruin  of  many. 

4.  Public  opinion  is  not  to  be  ignored.  A  strong  spec- 
ulative current  is  for  the  time  being  overwhelming,  and 
should  be  closely  watched.  The  rule  is,  to  act  cautiously 
with  public  opinion,  against  it,  boldly.  To  so  go  with  the 
market  even  when  the  basis  is  a  good  one,  is  dangerous. 
It  may  at  any  time  turn  and  rend  you.    Every  speculator 


THE     ABC     OF     STOCK    SPECULATION.  151 

knows  the  danger  of  too  much  "company."  It  is  equally 
necessary  to  exercise  caution  in  going  against  the  market. 
This  caution  should  be  continued  to  the  point  of  wavering 
— of  loss  of  confidence — when  the  market  should  be  boldly 
encountered  to  the  full  extent  of  strength,  nerve  and  capi- 
tal. The  market  has  a  pulse,  on  which  the  hand  of  the 
operator  should  be  placed  as  that  of  the  physician  on  the 
wrist  of  the  patient.  This  pulse-beat  must  be  the  guide 
when  and  how  to  act. 

5.  Quiet,  weak  marTcets  are  good  marhets  to  sell.  They 
ordinarily  develop  into  declining  markets.  But  when  a 
market  has  gone  through  the  stages  of  quiet  and  weak  to 
active  and  declining,  then  on  to  semi-panic  or  panic,  it 
should  he  hought  freely.  When,  vice  versa,  a  quiet  and 
firm  market  develops  into  activity  and  strength,  then  into 
excitement,  it  should  be  sold  with  great  confidence. 

6.  In  forming  an  opinion  of  the  market  the  element 
of  chance  ought  not  to  be  omitted.  There  is  a  doctrine 
of  chances — Napoleon,  in  his  campaign,  allowed  a  margin 
for  chances — for  the  accidents  that  come  in  to  destroy  or 
modify  the  best  calculation.  Calculation  must  measure 
the  incalculable.  In  the  "reproof  of  chance  lies  the  true 
proof  of  men."  It  is  better  to  act  on  general  than  special 
information  (it  is  not  so  misleading),  viz.:  the  state  of 
the  country,  the  condition  of  the  crops,  manufactures, 
etc.  Statistics  are  valuable,  hut  they  must  be  kept  subord- 
inate to  a  comprehensive  view  of  the  whole  situation. 
Those  who  confine  themselves  too  closely  to  statistics  are 
poor  guides.  "There  is  nothing,"  said  Canning,  "so  falla- 
cious as  facts  except  figures."    ''When  in  doubt  do  noth- 


152  THE     ABC     OF     STOCK     SPECULATION. 

ing."  Don't  enter  the  market  on  half  conviction;  wait  till 
the  convictions  are  full  matured. 

7.  I  have  written  to  little  purpose  unless  I  have  left 
the  impression  that  the  fundamental  principle  that  lies 
at  the  base  of  all  speculation  is  this:  Act  so  as  to  keep  the 
mind  clear,  its  judgment  trustworthy.  A  reserve  force 
should  therefore  be  maintained  and  kept  for  supreme  mo- 
ments, when  the  full  strength  of  the  whole  man  should  be 
put  on  the  stroke  delivered. 


THE    ABC     OF     STOCK     SPECULATION.  153 


CHAPTER  XXVIII. 

Successful  and  Unsuccessful  Speculators. 

Speculators  may  be  divided  broadly  into  two  classes — 
those  who  are  successfvil  and  those  who  are  unsuccessful. 
The  successful  speculator  when  compared  with  the  total 
number  of  speculators  is  in  the  small  minority.  This  is 
a  statement  that  can  be  established  by  an  examination  of 
any  broker's  books  of  accounts.  Even  in  a  bull  market,  the 
only  market  in  which  the  outside  speculator  will  trade 
freely,  speculators  for  the  rise  lose  money. 

Almost  all  speculators  are  amateurs.  They  approach  the 
market  with  confidence,  score  an  initial  success  and  then 
cast  prudence  to  the  winds.  Failure  is  the  result.  It  takes 
time  to  make  a  successful  speculator,  except  under  extra- 
ordinary circumstances.  While  simple  purchases  and  sales 
are  in  themselves  extremely  easy,  knowledge  of  stock  specu- 
lation can  only  be  acquired  by  experience.  A  55-year-old 
Stock  Exchange  broker  who  won  and  lost  three  fortunes 
and  yet  managed  to  retire  on  a  competency,  remarked  on 
one  occasion:  "A  man  usually  quits  this  business  at  the 
time  when  he  should  begin  to  make  money.''  This  broker 
won  his  early  successes  in  the  days  of  Vanderbilt  and 
Gould.  Later  he  was  unsuccessful,  and  in  the  markets  of 
1896  to  1902  his  winnings  were  not  notably  heavy.  Just 
prior  to  his  retirement  he  said :    "The  market  has  changed 


154  THE     ABC     OF     STOCK    SPECULATION. 

since  I  was  a  young  man.  It  is  a  much  larger  proposition. 
As  I  grow  older  I  find  that  I  lack  the  nerve  of  my  youth. 
The  younger  men  have  the  nerve  and  vitality  which  I  lack. 
I  love  to  trade  and  can  make  money  in  any  market  as  a 
trader,  provided  the  fluctuations  are  wide  enough,  hut  my 
judgment  of  prolonged  price  movement  can  no  longer  be 
relied  upon,  although  I  know  men  who  are  as  correct  in 
their  market  conclusions  to-day  as  I  was  15  and  25  years 
ago.  I  suppose  that  I  am  too  much  inclined  to  measure 
events  by  my  old  yard  stick;  in  other  words,  I  am  behind 
the  times." 

A  successful  Hebrew  speculator,  a  young  man  of  35, 
said  during  a  discussion  of  stock  speculation:  "I  started 
out  in  the  dry  goods  business  and  recall  the  time  when  a 
dry  goods  merchant  who  speculated  in  stocks  was  regarded 
as  an  unsafe  man  by  his  friends  and  creditors.  He  was  the 
exception,  and  yet  to-day  the  merchant  who  does  not  specu- 
late is  probably  the  exception.  The  introduction  of  indus- 
trial stocks  doubtless  has  had  much  to  do  with  the  changed 
conditions.  In  my  opinion  the  man  who  comes  to  Wall 
Street  without  experience  in  stock  speculation  and  in  pos- 
session of  a  large  sum  of  money  will  become  bankrupt  or 
crazy  or  both.  Wall  Street  is  no  place  for  a  man  with 
money.  The  only  man  entitled  to  consider  himself  the 
possessor  of  hard  common  sense  and  the  right  attitude  to- 
ward this  business  is  the  one  who  is  satisfied  to  risk  a  very 
little  money  in  an  experiment  to  ascertain  if  he  has  the 
right  temperament  for  a  speculator,  and,  reasoning  powers 
that  can  be  successfully  applied  to  market  movements." 

It  would  appear  therefore  that  the  successful  speculator 


THE     ABC     OF     STOCK     SPECULATION.  155 

should  have  the  knowledge  gained  through  experience,  a 
condition  which  is  suggestive  of  a  period  of  experimentation 
and  losses.  Judging  from  the  view  of  the  retired  broker  a 
man  may  have  too  much  experience,  but  this  experience  will 
be  an  advantage  to  him  in  gaining  a  livelihood  as  a  trader. 
From  the  Hebrew's  point-of-view  the  speculator  must  expe- 
rience the  up-and-downs  of  victory  and  defeat  before  he 
can  consider  himself  to  be  other  than  a  novice. 

It  must  not  be  concluded,  however,  that  all  experienced 
Wall  Street  men  are  successful  speculators.  Quite  the  con- 
trary is  true.  Many  of  the  most  successful  brokers  never 
speculate,  experience  having  taught  them  that  they  do  not 
possess  those  mental  faculties  required  in  the  successful 
speculator.  Other  Stock  Exchange  firms, 'in  their  articles 
of  co-partnership,  require  that  no  partner  shall  be  permit- 
ted to  speculate.  It  is  also  true  that  the  financial  critics, 
who  write  so  knowingly  and  cleverly  of  mar]jet  movements, 
are  not  successful  speculators,  insomuch  as  they  are  rarely 
men  of  wealth.  If  their  market  judgment  were  as  sound 
and  accurate  as  they  would  lead  one  to  believe  from  a 
perusal  of  their  articles,  there  is  no  reason  why  they  should 
not  be  millionaires  in  fact,  and  yet,  strange  to  say,  financial 
journalism  has  not  yet  produced  a  millionaire  speculator. 

It  is  hardly  reasonable,  therefore,  for  the  amateur  specu- 
lator to  expect  to  make  successful  ventures  until  he  has  had 
some  experience,  and  this  experience  presumably  will  cost 
money.  It  certainly  seems  wise  for  the  novice  to  reduce 
his  early  speculations  to  the  minimum  limit.  If  he  con- 
templates trading  in  100  shares,  the  preliminary  ventures 
should  be  reduced  to  10  when  his  theories  of  market  move- 


156  THE    ABC     OF     STOCK     SPECULATION. 

ments  and  judgment  may  have  ten  tests  at  the  cost  of  one 
100  share  venture.  Undoubtedly  one  of  the  great  roads  to 
failure  in  stock  speculation  is  the  one  which  leads  a  specu- 
lator to  trade  on  small  margins,  with  no  reserve;  to  score 
early  success,  and  to  enlarge  his  operations  until  he  is  so 
extended  that  the  first  serious  decline  turns  profit  into  loss. 

It  has  been  said  often  enough  that  Wall  Street — meaning 
the  stock  market — is  reasonable;  that  in  "the  end  reason 
prevails."  What  is  meant  is  that  after  a  prolonged  period 
of  fluctuation  the  price  of  a  stock  approximates  its  real 
money  earning  value.  This  value,  however,  fluctuates  also 
with  bad  and  good  times.  Values  ultimately  determine 
prices.  Values  are  often  hard  to  ascertain.  They  are  more 
attainable  in  the  railroad  than  the  industrial  quarter.  The 
more  obscure  they  are  the  more  violent  the  fluctuations 
and  the  more  violent  the  fluctuations  the  greater  the  risk 
of  the  speculator,  and  especially  the  one  who  trades  on  a 
margin. 

It  may  be  asked  by  the  seeker  for  principles.  Can  safe 
and  definite  rules  be  formulated  through  known  methods 
of  reasoning  by  the  speculator?  Unquestionably  the  man 
with  a  logical  mind,  who  can  analyze  all  the  factors  govern- 
ing price  movements,  has  an  immense  advantage  over  the 
most  common  type,  known  as  the  "guesser."  The  success- 
ful speculator,  however,  must  not  only  reason  logically 
regarding  transpired  events,  but  he  must  anticipate  the  re- 
sults of  those  that  are  coming.  A  man's  reasoning  may  be 
accurate  and  even  then  his  speculations  are  at  the  mercy 
of  the  "unexpected  development"  which  has  been  the  Wa- 
terloo for  more  than  one  unfortunate  taker  of  chances. 


THE     ABC     OF     STOCK     SPECULATION.  157 

If  "the  basis  of  inductive  reasoning  is  the  natural  in- 
clination of  the  mind  to  believe  that  whatever  is  true  of  a 
considerable  number  of  individuals,  will  be  true  of  the 
whole  class  to  which  these  individuals  belong/'  then  the 
simple  inductive  reasoner  will  not  succed  as  a  speculator, 
and  yet  in  this  class  must  be  included  most  speculators. 
Their  conclusions  are  hasty  and  not  subjected  to  the  test 
of  further  reasoning. 

And  if  the  speculator  is  to  rely  upon  deductive  reasoning 
on  the  belief  that  "whatever  can  be  affirmed  of  an  entire 
class  can  be  affirmed  of  every  individual  of  that  class,''  he 
will  find  that  he  has  many  associates  who  have  been  flat 
failures. 

ISTor  can  the  stock  market  be  unerringly  judged  by 
"demonstrative"  or  "probable"  reasoning.  It  is  true 
that  the  speculator  does  at  times  form  premises  that  lead 
to  accurate  conclusions.  The  premises  are  the  "mathemati- 
cal or  other  self-evident  truths." 

In  the  practical  work  of  the  stock  market  premises  are 
formed  on  statements  and  beliefs  that  may  be  called  "prob- 
able truths" ;  they  are  supposed  to  be  true  and  are  believed. 
The  conclusions  in  all  such  syllogisms,  like  the  premises, 
however,  are  only  "probable"  truths,  and  so  the  "probabil- 
ity" factor  becomes  very  important.  The  successful  specu- 
lator can  only  accurately  rate  Wall  Street  statements  of 
"probable  truths"  when  he  has  acquired  knowledge  of  stock 
market  manipulators,  and  the  speculative  public.  Most 
stock  market  speculative  ventures  are  based  on  "loose  rea- 
soning" or  bold  guess  work,  hence  the  speculator  contends 
not  only  with  his  own  tendency  to  fallacious  reasoning  bu^ 


158  THE     ABC     OF     STOCK     SPECULATION". 

with  the  sophistry  of  the  manipulators  and  manufactures 
of  stock.  There  has  been  discussion  of  speculators  who  pos- 
sess "intuitive  judgment."  The  idea  that  the  market  will 
undergo  a  change  becomes  an  impulse,  and  straightway  the 
impulse  becomes  a  venture.  In  speculation  their  theory 
is  that  "he  who  hesitates  is  lost,"  but  the  trader  who  pos- 
sesses intuitive  stock  market  judgment  of  value  can  be 
counted  upon  the  fingers  of  one  hand. 

"Eeasoning  rests  upon  the  ultimate  basis  of  immediate 
and  intuitive  judgments,"  and  the  average  stock  speculator 
must  stand  or  fall  on  the  accuracy  of  his  own  conclusions. 
His  powers  of  reasoning  should  be  nicely  balanced  and  ad- 
justed. He  should  be  a  shrewd  judge  of  "men,  money  and 
things."  Eeasoning,  born  of  his  own  experience,  is  of  the 
most  permanent  value.  It  is  direct  evidence.  As  a  matter 
of  fact,  however,  he  is  a  trader  generally  on  "circumstantial 
evidence,"  for  which  he  has  formed  rules  and  which  are 
chiefly  remarkable  for  missing  links.  Eeasoning  by  anal- 
ogy must  also  be  employed  by  the  speculator  who  will  find 
in  all  probability  that  like  his  fellow,  he  prefers  others  to 
do  his  reasoning  for  him  when  it  becomes  difficult. 

In  the  stock  market,  as  elsewhere,  men  love  to  follow  a 
leader.  They  will  take  desperate  chances  on  the  opinions 
of  others;  on  the  merest  hearsay,  the  most  absurd  rumor. 
They  are  as  easily  frightened  as  a  flock  of  sheep  and  credu- 
lous to  the  point  of  stupidity.  Men  who  are  contemptibly 
mean  in  the  matter  of  expenditures  on  themselves  and  their 
families  will  lose  thousands  of  dollars  in  betting  on  a  tip, 
and  others  who  in  their  ordinary  walks  of  business  are  sane 
and  reasonable  lose  all  their  powers  of  reason  on  coming  in 


THE     ABC     OF     STOCK     SPECULATION.  159 

contact  with  the  "chance"  to  make  "something  for  noth- 
ing." 

"If/'  said  a  wealthy  business  man  and  a  losing  specu- 
lator, "I  would  be  satisfied  with  the  profits  and  losses  I 
make  in  my  own  business  I  could  become  rich  in  Wall 
Street;  but  no,  I  am  too  greedy.  That  is  the  trouble  with 
almost  all  men  who  speculate." 

"My  speculations,"  said  a  successful  speculator,  "would 
be  more  successful  if  I  kept  faith  with  myself.  In  the 
morning  I  come  down  town  promising  myself  to  carry  out 
a  certain  plan  of  campaign.  I  depart  from  it  on  a  snap 
judgment.  The  sound  conclusion  was  the  one  I  should 
have  adopted  every  time." 

There  is  a  type  of  speculator  who  has  been  making  im- 
aginary ventures  based  on  the  daily  quotations.  He  is  in- 
variably successful.  This  is  the  same  man  who  always  tells 
his  friends  what  to  do,  and  what  he  and  they  might  have 
made  had  his  "judgment"  been  followed.  The  writer  has 
met  this  man  as  he  was  about  to  test  his  judgment  in  the 
market  itself — and  after.  Needless  to  say  he  has  made  no 
distinction  between  the  two  propositions,  in  one  of  which 
he  is  "out"  of  the  market  and  the  other  "in."  He  ascer- 
tains that  it  is  quite  one  thing  to  have  his  money  in  his 
pocket  and  another  to  have  it  staked  upon  the  rise  and  fall 
of  a  stock.  With  his  money  up,  he  is  swayed  by  the  passions 
of  the  gambler.  He  is  deluded  by  the  sophisms  uttered 
by  the  manufacturers  of  "news,"  he  is  impatient,  stout  and 
weak-hearted  in  succession,  a  creature  beset  by  worry  in  a 
new  form,  and  torn  by  a  conflict  of  emotions  that  were 
absolutely  foreign  to  him  when  he  traded  on  paper  and 


160  THE     ABC     OF     STOCK     SPECULATION. 

made  money.  A  good  stock  market  advisor  may  be  a  very 
poor  speculator,  as  is  frequently  the  case.  The  man  who 
contemplates  embarking  upon  the  sea  of  speculation  should 
carefully  consider  the  psychological  side  of  speculation. 

A  man  may  place  a  wager  on  a  horse  or  a  card.  The 
decision  is  almost  instantaneous  or  at  the  most  requires 
but  a  few  minutes.  The  mental  strain  and  worry  incidental 
to  the  decision  that  you  win  or  lose  is  not  of  long  or  serious 
duration.  In  stock  speculation  the  duration  of  your  ven- 
ture may  be  weeks  or  months.  This  factor  of  uncertainty 
and  suspense,  inducing  worry  and  impairment  of  reasoning 
powers,  increases  or  decreases  in  keeping  with  the  tempera- 
ment and  capital  of  the  speculator.  He  may  be  a  "good 
loser"  or  a  "bad  loser."  He  may  be  rich  and  can  afford  the 
loss  when  his  judgment  will  not  be  impaired  or  he  may 
be  relatively  poor  or  unduly  extended  when  his  judgment 
becomes  utterly  worthless.  Here  we  have  the  crux  of  the 
speculative  proposition — ^a  man  may  embark  on  his  ven- 
tures backed  by  accurate  powers  of  reasoning ;  but  on  mak- 
ing his  hazard  the  suspense  is  unexpectedly  prolonged  or 
his  margin  is  tested  to  the  extreme  point  of  elasticity,  or 
there  is  some  other  unlooked  for  adverse  influence  when 
he  succumbs  to  loss  of  nerve. 

"Loss  of  nerve"  is  an  expression  often  used  in  Wall 
Street.  A  man  may  be  accurately  diagnosing  the  stock 
market  fluctuations  and  yet  "lose  his  nerve"  on  the  day 
or  the  week  prior  to  the  successful  fruition  of  his  commit- 
ment. But,  having  lost  his  nerve,  he  retires  defeated  and 
perhaps  a  loser.  "Loss  of  nerve"  is  frequent  among  pro- 
fessional, but  more  common  among  amateur  speculators, 


THE     ABC     OF    STOCK    SPECULATION.  161 

and  it  may  bo  accompanied  by  a  still  worse  symptom — 
loss  of  power  to  act — leaving  the  victim  irresolute,  unde- 
cided and  the  prey  to  hundreds  of  whims  and  fancies.  In 
his  observations  the  writer  has  known  old  and  successful 
speculators  to  lose  their  nerve  and  liquidate  their  stocks 
on  the  "twaddle"  of  a  loud-voiced,  irresponsible  reporter 
who  talked  of  possible  disasters  during  a  temporary  period 
of  distress. 

And  again,  it  has  been  observed  that  a  room  can  bo 
crowded  with  small,  happy,  talkative  speculators  during  a 
rising  market  and  be  succeeded  by  the  same  room  crowded 
with  gloomy,  discontented,  silent  speculators  during  a 
slight  decline.  Enter  the  same  room,  during  the  decline, 
a  "bear,"  vigorously  outspoken,  and  the  equanimity  of  the 
room  and  the  nerve  of  the  speculators  is  lost  to  the  point 
that  the  manager  of  the  office  has  difficulty  in  keeping  his 
customers  from  needlessly  sacrificing  stocks,  while  the 
interval  may  be  one  of  natural  reaction. 

The  manager  of  a  large  commission  office,  where  many 
hundred  thousand  dollars  are  lost  annually,  says :  "I  hate 
to  see  men  lose  money ;  but  if  they  did  not  lose  it  here  they 
would  go  somewhere  else.  This  is  the  only  business  that 
I  understand.  I  have  made  and  lost  a  fortune  in  it.  Now, 
although  I  am  a  young  man  (42),  I  would  willingly  sell 
out  my  chances  for  an  annuity  of  $5,000  a  'year.  Do  I 
speculate  ?  No.  I  prefer  a  good  appetite,  and  sound  sleep 
to  a  poor  appetite  and  broken  sleep.  My  friends  think  I  am 
pretty  clever,  and  so  I  am,  but  I  am  no  cleverer  than  the 
large  majority  of  speculators,  although  there  are  times 
when  my  judgment  is  much  better  than  theirs.    Disinter- 


162  THE     ABC     OF     STOCK     SPECULATION. 

ested  advice,  under  the  circumstances,  is  better  than  their 
own  judgment.  Yes,  of  course  the  majority  are  losers. 
Most  of  them  are  unable  to  acquire  the  most  simple  and 
essential  principle  of  the  game,  i.  e.,  taking  a  small  loss. 
In  this  contest  men  are  not  their  normal  selves.  I  refer 
now  to  the  margin  speculator  who  is  gambling  and  governed 
by  passion  and  excitement.  He  is  far  removed  from  my- 
self, for  example.  I  am  cold  and  impassive,  even  during 
a  panic,  for  I  am  not  risking  money.  I  must  see  to  it  that 
the  firm  does  not  lose  money  and  we  must  sacrifice  the 
gamblers  with  a  strong  hand — not  becaus^e  we  like  to,  but 
because  we  have  to.  The  successful  speculator  in  the  time 
of  stress  I  take  it,  should  have  the  same  control  of  himself 
as  I  have  and  I  know  very  few  speculators  who  are  out- 
wardly and  inwardly  calm  when  they  are  steadily  losing 
and  perhaps  threatened  with  serious  losses  or  even  bank- 
ruptcy. I  have  not  that  control  over  myself,  and  that  is 
why  I  lost  my  money. 

"Then  again,  the  average  speculator  buys  stocks  when 
they  arc  'strong'  and  sells  them  when  they  are  'weak.'  This 
is  a  common  principle  with  them  and  shows  fallacious  rea- 
soning. In  stock  fluctuations,  prices  advance  and  decline, 
or  vice  versa,  as  it  is  a  bull  or  a  bear  market.  Therefore 
when  a  stock  is  'strongest,'  to  the  superficial  eye,  it  is  really 
'weakest,'  fof  then  it  should  be  sold  for  a  reaction,  just  as  it 
is  sold  by  the  so-called  insiders.  When  outside  buying 
orders  are  most  numerous,  a  decline  usually  follows,  and 
in  the  case  of  a  bear  market  the  conditions  are  precisely 
reversed." 

During  normal  markets,  brokers  have  observed  that  the 


THE     ABC     OF     STOCK     SPECULATION.  163 

psychological  factor  is  so  strong  that  speculators  are  not 
disposed  to  trade  as  freely  and  confidently  in  wet  and 
stormy  weather  as  they  are  during  the  dry  days  when  the 
sun  is  shining,  and  mankind  cheerful  and  optimistic.  The 
average  stock  speculator  is  an  optimist,  and  usually  an 
enthusiast.  He  is  on  the  constructive  side  of  the  account ; 
he  speculates  for  the  rise.  He  is  easily  influenced — it  may 
be  Ijy  the  weather  or  it  may  be  by  idle  gossip,  and  frequent- 
ly his  cause  of  failure  is  due  to  temperamental  shortcom- 
ings of  his  own  with  which  his  broker  only  is  acquainted 
and  to  which  he  is  absolutely  blind. 

The  average  man  prides  himself  on  his  judgment.  He 
is  an  egotist,  a  vain  creature  and  places  an  exaggerated 
value  on  his  own  acumen.  In  the  study  of  several  hundred 
speculators  the  writer  has  observed  that  the  amateur  spec- 
ulator, when  he  makes  a  winning  on  his  broker's  suggestion 
or  advice,  calmly  and  unhesitatingly  compliments  himself 
on  his  own  excellent  judgment.  Per  contra  if  the  venture 
is  a  losing  one  he  has  no  hesitation  in  blaming  his  broker 
for  the  error  of  judgment.  He  is  always  reluctant  to 
acknowledge  that  the  loss  may  have  been  due  to  his  own 
error;  in  fact  he  places  so  high  a  value  on  his  own  judgment 
that  in  seeking  for  excuses  for  the  loss  the  idea  of  blaming 
his  faulty  methods  or  reasoning  capacity  is  the  last  idea 
which  occurs  to  him.  There  is  no  broker  of  experience  who 
is  not  familiar  with  this  type. 

Conceit  in  this  form  is  probably  responsible  for  the  in- 
ability of  the  average  speculator  to  accept  small  losses. 
Now  the  average  speculator  will  take  a  1  to  3  per  cent, 
profit  and  a  5  or  10  per  cent.  loss.    A  speculator  who  pays 


164  THE     ABC     OF     STOCK     SPECULATION. 

1/4  commission  for  the  round  turn  and  interest  charges — 
say  Yg  more — or  %  net  on  every  hundred  shares  must 
make  1  per  cent,  at  least  on  every  four  transactions  to  be 
even  with  the  game.  That  is  his  handicap,  and  it  is  a 
severe  one.  But  it  is  a  well-known  fact  that  the  penalty  is 
not  considered  in  this  light.  If,  therefore,  it  is  calculated 
along  with  the  traders'  tendency  to  take  small  profits  and 
large  losses,  it  will  at  once  be  acknowledged  that  the  ama- 
teur who  backs  his  "raw"  judgment  has  a  precarious  foot- 
hold in  the  quicksand  which  has  overtaken  him. 

The  speculator  will  purchase  a  stock  on,  say,  a  10  per 
cent,  margin.  If  it  advances  1^  points  he  will  likely  take 
his  profit.  If  it  declines  1%  points  he  will  hang  on  in 
the  hope  that  he  made  no  error  of  judgment,  although  ho 
is  somewhat  doubtful.  Should  the  decline  be  continued  ha 
will  become  even  more  doubtful,  but  as  the  loss  is  a  sub- 
stantial one,  he  is  determined  not  to  take  it  but  to  "hang 
on,"  as  he  is  a  fighter.  Should  the  decline  become  more 
extensive,  he,  to  use  his  own  expression,  becomes  "obsti- 
nate." He  "knows"  that  he  is  "right"  and  is  determined 
to  see  "the  thing  through."  And  finally  he  probably  closes 
the  trade  when  his  broker  advises  hijn  to  sell  out  or  deposit 
more  margin. 

A  successful  speculator  must  make  1  per  cent,  on  every 
four  trades  to  be  even  with  the  game,  and  he  must  exactly 
reverse  the  novices'  usual  procedure  of  taking  large  losses 
and  small  profits.  If  he  finds  on  testing  his  capabilities 
that  he  cannot  do  so,  then  he  should  abandon  the  specula- 
tive field  to  others,  as  there  is  no  profit  in  it  for  him. 

Upon  more  than  one  occasion  the  writer  has  known  of 


THE     ABC     OF     STOCK     SPECULATIOIT,  165 

two  persons  trading  through  a  commission  house  in  this 
way.  One  would  buy  a  stock  at  a  price  and  the  other  sell  it 
short  at  the  same  price  and  yet  both  lose  money.  For  ex- 
ample, A  bought  100  shares  of  Sugar  at  124%  and  B  sold 
short  100  shares  of  Sugar  at  124:yy,  and  for  the  moment 
this  was  the  high  price.  Sugar  the  following  day  declined 
to  123,  at  which  point  A,  becoming  nervous,  sold  and  lost 
$212.50  plus  one  day's  interest.  B,  elated  over  the  keenness 
of  his  Judgment  and  his  beautiful  foresight,  made  his  trade 
with  the  idea  of  securing  a  1  per  cent,  profit,  but  success 
emboldened  him  and  he  changed  his  plan  and  determined  to 
hold  on.  Two  days  later  Sugar  had  not  only  recovered  its 
loss  but  had  advanced  to  128^^,  where  the  short  stock 
was  bought  in  at  a  loss  of  $362.50.  So  much  for  the  judg- 
ment of  the  amateur  speculator. 

Again,  it  is  to  be  observed  that  a  manipulated  stock 
breaks  sharply.  The  object  of  the  break  may  be  to  force 
out  margin  traders — to  dislodge  their  holdings  when  the 
advance  will  be  resumed.  The  margin  trader  will  grimly 
contemplate  the  decline  and  finally,  when  a  serious  loss 
confronts  him,  will  sell  out.  He  has  too  much  "com- 
pany," for  other  speculators  in  the  same  predicament  are 
doing  precisely  the  same  thing — selling  out  at  a  loss,  which 
is  exactly  what  the  manipulators  playing  with  known  con- 
ditions want.  The  manipulators  having  secured  the  desired 
stock  and  resumed  the  advance  the  speculator  reasons  with 
himself  after  this  fashion :  "There,  I  told  you  so.  I  knew  I 
was  right  about  that  stock.   Didn't  I  say  to  myself  that  it 

would  sell  up  to  ?     Wasn't  I  convinced  by  what  I 

knew  that  I  had  the  right  idea?    Just  my  infernal  luck. 


166  THE    ABC     OF     STOCK     SPECULATION. 

If  I  had  only  held  fast  and  sat  through  the  decline  I  would 
have  been  all  right."  Delusions  again.  There  were  many 
others  who  bought  and  sold  under  the  same  conditions. 
The  decline  would  have  been  continued  until  all  or  most  of 
the  stock  in  question  had  been  liquidated.  The  purchases 
of  the  margin  speculators  caused  the  manipulated  decline. 
Their  forced  liquidation  was  necessary  before  the  rise 
could  be  resumed.  His  sale  of  the  stock  induced  the  rally, 
or  was  at  least  a  prerequisite.  His  purchase  at  the  "top" 
helped  check  the  rise  and  furnished  fuel  for  a  decline  profit- 
able to  the  manipulators.  And  yet  in  his  own  reasoning  he 
has  not  considered  himself  as  a  factor  contributing  to  the 
decline  and  aiding  the  subsequent  recovery.  In  other 
words  his  judgment  is  wholly  at  fault;  his  conclusions  were 
in  error  when  the  commitment  was  made  and  again  fol- 
lowing its  consummation.  He  deceives  himself  so  cleverly 
that  the  sophism  of  the  manipulator  is  hardly  necessary  to 
add  attractiveness  and  fascination  to  the  struggle  for 
money. 

To  sLand  in  the  office  of  a  commission  firm  all  day  and 
hear  the  market  opinions  expressed  and  the  reasons  for 
making  commitments  is  to  understand  why  so  much  money 
is  lost.  The  man  who  "guesses,"  who  has  a  "fancy  for  a 
particular  stock,"  "who  wishes  to  make  a  bit,"  who  has  "a 
tip,"  is  in  the  majority.  He  has  the  speculative  fever,  and 
having  contracted  the  disease  he  has  not  the  time  nor  the 
mood  to  adopt  the  reasoning  dictated  by  ordinary  common 
sense. 

"Buy,"  says  a  customer  to  his  broker,  "100  shares  of 
Metropolitan  at  1 50." 


THE     ABC     OF     STOCK     SPECULATION'.  167 

The  stock  is  bought  at  a  cash  cost  of  $15,000.  The  cus- 
tomer's equity  in  the  stock  is  $1,000.  The  stock  is  capable 
of  wide  fluctuations. 

"What  did  you  buy  it  on?"  the  customer  is  asked. 

"My  friend  Smith  told  me  that  it  is  going  up." 

"Who  is  Smith  ?" 

"Oh,  a  neighbor  of  mine.  He  heard  it  was  a  good  thing 
from  Jones,  whose  cousin  is  a  director  in  the  company." 

Would  this  man,  who  is  a  type,  have  invested  $15,000 
(equity  $1,000)  in  his  own  business  (mercantile)  without 
a  most  careful  investigation  of  conditions,  and  conse- 
quences, profits  and  losses,  present  and  prospective  ?  Would 
Smith  and  Jones  influence  him  in  such  a  transaction? 
Certainly  not.  And  yet  thousands  of  stock  market  ven- 
tures are  made  annually  without  any  more  justification. 

Therefore  if  about  to  speculate  in  stocks,  it  behooves 
you  to  ask  yourself  if  you  possess  the  temperament  and 
accurate  and  swift  reasoning  powers  necessary  to  cope  with 
the  ablest  money  getters  in  the  world.  If  you  do,  you  will 
find  that  hprdly  a  day  passes  that  Wall  Street  does  not 
present,  great  opportunities  for  your  skill  in  money  making. 


168  THE    ABC     OF     STOCK   SPECULATION. 


CHAPTER  XXIX. 

An  Interesting  Inquiry. 

A  correspondent  asks  for  an  explanation  in  detail  of 
the  meaning  of  "a  large  short  interest/'  "a  squeeze  of 
shorts/'  "loaning  rates  for  stocks/'  etc. 

This  inquiry  implies  some  lack  of  comprehension  of  the 
principles  involved  in  short  selling,  and  as  it  comes  from 
a  banker,  it  is  possible  that  others  may  be  interested  in  a 
statement  of  how  it  is  practicable  to  operate  for  a  fall. 
The  present  form  of  operating  for  a  fall  is  a  modern  de- 
vice. It  was  preceded  by  a  system  of  "buyers  and  sellers 
options"  by  means  of  which  a  buyer  or  seller  acquired  a 
right  to  deal  at  specified  prices  at  dates  more  or  less  distant 
from  the  date  of  the  contract.  This,  however,  was  a  rather 
awkward  method  of  trading  and  has  ceased  to  exist  in  this 
market,  except  w^hen  it  is  unusually  diflficult  to  borrow 
stock. 

In  operating  for  a  rise,  only  two  parties  are  necessary  for 
the  contract.  One  buys  and  one  sells.  Delivery  of  the 
stock  is  made  by  the  seller  to  the  buyer;  payment  is  re- 
ceived and  the  transaction  is  closed. 

An  operation  for  a  fall,  as  carried  on  in  the  New  York 
Stock  Exchange,  require  three  parties  for  its  completion. 
Let  us  suppose  that  People's  Gas  is  selling  at  par.  A, 
although  not  the  owner  of  any  People's  Gas,  believes  thai 


THE     ABC     OF     STOCK     SPECULATION.  169 

the  price  will  go  lower.  He,  accordingly,  offers  a  hundred 
shares  of  the  stock  at  par.  B  accepts  this  offer  and  acquires 
the  stock.  A  thereupon  goes  to  C,  who  owns  People's  Gas, 
and  borrows  100  shares,  which  A  then  delivers  to  B.  B 
pays  A  $10,000,  the  price  of  100  shares,  and  the  transaction, 
as  far  as  A  and  B  are  concerned,  is  at  an  end.  But  A,  in 
order  to  obtain  the  use  of  the  stock  owned  by  C,  has  to 
deliver  to  C  $10,000  as  security  for  the  return  of  the  bor- 
rowed stock.  Time  elapses  when  it  may  be  supposed  that 
People's  Gas  has  fallen  to  95.  A  then  buys  of  D  100  shares 
at  95,  and,  receiving  the  stock  from  D,  returns  it  to  C, 
the  previous  lender,  and  receives  back  from'  C  the  $10,000 
deposited  as  security  for  the  loan  of  the  stock.  A  has, 
therefore,  made  $500  as  the  result  of  the  operation  for  a 
fall  begun  with  B, 

A  number  of  questions  may  be  anticipated.  Can  A  with 
certainty  borrow  stock  from  C  ?  If  C  has  the  stock,  and 
some  one  always  has  it,  he  is  willing  to  lend  it  because 
there  is  little  risk  in  so  doing  and  because  C  gets  the  use 
of  A's  money,  deposited  as  security,  at  lower  rates  of  inter- 
est than  C  would  have  to  pay  for  the  use  of  the  same 
amount  of  money  if  borrowed  from  a  bank.  Furthermore, 
if  C  borrowed  $10,003  from  his  bank,  he  would  be  obliged 
to  give  as  collateral  securities  valued  at  perhaps  $12,000, 
whereas  by  loaning  his  stock  to  A  he,  in  effect,  procures  a 
loan  of  $10,000  from  A  by  the  use  of  only  $10,000  col- 
lateral. 

The  practice  of  borrowing  and  lending  stocks  is  so  uni- 
versal that  it  is  as  much  a  part  of  the  business  to  borrow 
stocks  as  it  is  to  borrow  money  at  the  banks.    The  customer 


170  THE     ABC     OF     STOCK     SPECULATION. 

of  an  office  has  no  trouble  or  difficulty  on  this  account. 
He  merely  gives  the  order  to  sell,  margins  his  account,  and 
the  broker  arranges  the  terms  of  borrowing  with  his  fellow 
brokers. 

If  there  is  a  general  impression  that  a  stock  is  going  to 
fall  many  people  may  sell  it  short  at  the  same  time.  In 
this  case,  the  borrowing  demand  may  exceed  the  current 
supply.  When  this  occurs  the  loaning  rates  fall.  That  is 
to  say,  A  gives  C  the  $10,000  as  before  described;  but,  on 
account  of  the  demand  for  the  stock,  C  does  not  pay  as 
much  interest.  Assuming  the  money  rate  to  be  4  per  cent., 
the  rate  on  borrowed  stock  under  normal  conditions  might 
be  3 1/2  per  cent.,  but  if  the  demand  to  borrow  were  quite 
large,  the  lender  of  the  stock  would  have  to  pay  only  2 
per  cent,  or  even  less  for  the  money  received  as  security. 

If  the  demand  to  borrow  were  still  greater,  the  stock 
would  loan  at  what  is  called  "flat,"  which  means  that  no 
interest  would  be  paid  on  the  money  deposited ;  or,  with  a 
still  greater  demand,  A  would  be  compelled  not  only  to  give 
C  the  use  of  the  $10,000  without  interest,  but  would  have 
to  give  C  an  arbitrary  sum,  called  premium,  in  addition 
for  the  use  of  the  borrowed  stock.  Premiums  range  all  the 
way  from  1-256  up  to  1  per  cent,  or  more  a  day — the  latter, 
of  course,  only  in  very  extraordinary  cases.  A  premium  of 
1-16  of  1  per  cent,  per  day  is  as  high  as  premiums  often 
go  even  in  a  bear  market.  This  means  that  A  not  only 
gives  his  money  without  interest,  but  pays  C  $6.25  per  day 
for  the  use  of  100  shares  of  stock.  This  premium  is,  of 
course,  charged  by  the  broker  to  the  customer  who  is  short 
of  the  stock. 

Generally  speaking,  it  is  cheaper  to  operate  on  tlie  short 


THE     ABC     OF     STOCK     SPECULATION.  171 

than  upon  the  long  side  of  the  market.  The  interest  ac- 
count always  runs  against  the  operator  for  a  rise,  while 
the  operator  for  a  fall,  selling  a  non-dividend  stock,  has 
no  interest  to  pay,  unless  the  short  interest  creates  a 
premium.  Some  houses  allow  customers  a  part  of  the  in- 
terest received  on  account  of  short  sales.  Traders  usually 
operate  more  heavily  upon  the  short  than  upon  the  long 
side,  as  it  does  not  take  as  much  capital,  the  money  required 
in  borrowing  stocks  being  furnished  by  the  buyer. 

All  this  suggests  the  meaning  of  the  term  "squeeze  of 
shorts."  If  a  large  number  of  people  are  borrowing  stocks, 
those  who  lend  the  stocks  know  who  the  borrowers  are,  and 
in  a  general  way,  something  of  the  amount  which  is  being 
borrowed.  The  rules  provide  that  the  borrower  can  any 
day  return  fhe  stock  borrowed  and  receive  back  his  money. 
The  lender  can  any  day  return  the  money  deposited  and  get 
back  the  stock  loaned,  in  which  case  some  other  lendei* 
must  be  found. 

When  a  bear  campaign  is  under  way,  the  owners  of 
stocks  see  their  property  depreciate  in  value.  They  then 
sometimes  form  combinations  for  the  purpose  of  calling  in 
a  large  part  of  the  stock  loaned  in  some  one  day.  The 
consequence  is  that  the  borrowers,  being  notified  to  return 
stock,  look  about  for  other  lenders,  and,  finding  the  supply 
insufficient,  are  obliged  to  buy  stock  in  order  to  get  it  for 
delivery,  and  this  buying,  coming  suddenly,  is  apt  to  make 
a  rapid  advance  in  prices,  especially  as  the  bulls  who  have 
called  in  the  stock  usually  join  in  advancing  quotations. 

This  would  seem  to  be  a  very  dangerous  position  for  the 
bear,  but  in  practice  squeezes  do  not  usually  last  very  long 
or  cause  very  great  fluctuations.     There  have  been  cases 


172  THE     ABC     OF     STOCK     SPECULATION, 

where  a  squeeze  of  shorts  has  sent  the  price  of  a  stock  up 
30  or  40  points  in  one  day.  There  have  been  a  considerable 
number  of  squeezes  which  have  advanced  prices  as  much  as 
10  points  in  a  day.  Ordinarily,  however,  the  total  advance 
in  a  squeeze  is  not  more  than  4  or  5  points  because  the 
owners  of  stock,  who  understand  the  reasons  for  decline  as 
well  as  anybody,  take  advantage  of  the  rise  to  sell  and  the 
bulls,  therefore,  supply  their  bear  friends  with  stock  enougl) 
to  make  the  required  deliveries.  The  possibilities  of  thia 
kind  always  make  the  short  interest  watched  with  more 
or  less  attention  as  containing  the  germs  of  advance  not 
founded  on  value,  but  on  the  necessity  of  having  stock  to 
deliver. 

A  corner  is  a  disastrous  affair,  very  seldom  occurring.  It 
means  that  the  bears  in  over  confidence  have  sold  more  of  a 
certain  stock  than  there  is  in  existence.  It  is,  therefore, 
impossible  for  some  of  the  bears  to  obtain  stock  for  deliv- 
ery and  the  bulls  therefore  are  able  to  bid  the  price  up  to 
any  figure  which  they  like.  It  is  theoretically  possible  for 
a  bear  to  be  absolutely  ruined  in  a  close  corner,  but  such  a 
thing  is  almost  impossible  in  these  days  of  large  capitaliza- 
tion. The  last  close  corner  in  the  market  was  in  Northern 
Pacific.  A  corner  usually  inflicts  great  loss  upon  the  people 
who  make  one  as  well  as  upon  the  bears  who  are  caught, 
and  knowledge  of  this  fact  has  led  the  great  market  lead- 
ers time  and  again  to  refuse  to  permit  corners  when  the 
oversold  condition  of  the  market  would  have  justified  it. 
Mr.  Gould  could  undoubtedly  have  made  a  close  corner  in 
Missouri  Pacific  in  1884,  but  he  absolutely  refused  to 
permit  anything  more  than  a  well  sustained  squeeze  of 
shorts. 


THE     ABC     OF     STOCK    SPECULATION.  173 

Broadly  speaking,  there  is  no  more  danger  in  being 
short  of  the  market  than  in  being  long,  although  care 
should  be  taken  to  sell  only  stocks  of  large  capital,  which 
are  known  to  have  been  distributed  and  in  which  trading 
is  active.  There  is  a  little  more  difficulty  in  selling  frac- 
tional lots  short  on  account  of  the  fact  that  it  is  some- 
times necessary  for  the  broker  to  borrow  100  shares  in  or- 
der to  deliver  20  or  30  shares.  Ordinarily,  however,  this 
is  arranged  with  the  odd  lot  dealers  without  difficulty. 

The  public  as  a  whole  avoids  the  short  side,  partly 
through  not  understanding  it  and  partly  through  what 
seems  to  be  a  natural  feeling  against  operating  for  a  fall. 
Even  among  professional  traders,  there  are  many  who 
have  an  instinctive  feeling  against  the  short  side  of  the 
market.  This,  however,  should  be  overcome  by  anyone 
dealing  in  stocks,  inasmuch  as  the  bear  period  is  usually 
longer  than  the  bull  period  and,  in  recent  years  an  oper- 
ator should  have  been  a  bear  through  at  least  half  of  every 
decade. 

It  has  been  said  occasionally  that  bears  never  make 
fortunes.  There  are  exceptions  to  this  rule,  and,  so  far 
as  it  is  a  rule,  it  is  due  to  the  fact  that  the  general  de- 
velopment of  the  country  has  had  a  tendency  to  bring  out 
whole  people  who  stayed  long  of  securities  even  through  a 
reorganization.  This  will  probably  be  true  to  a  certain 
extent  in  the  future.  Nevertheless  a  great  deal  more 
money  has  been  lost  on  the  long  side  of  stocks  than  was 
ever  lost  on  the  short  side.  There  is  no  sound  reason 
against  operating  for  a  fall,  when  a  bear  period  is  under 
■way.:._ :   :  _        .    ^     .  ..  t ;    ^  .  .     - 


174  THE    ABC     OF     STOCK     SPECULATION. 


CHAPTER  XXX. 
Stock  Market  Manipulation. 

The  machinery  of  a  "pool"  in  stocks  and  the  process  of 
"working"  the  market  is  described  as  follows  by  an  expe- 
rienced manipulator. 

"It  is  only  fair  to  say  that  the  public  rarely  sees  value 
until  it  is  most  markedly  demonstrated  to  them,  and  the 
demonstration  comes  generally  at  a  pretty  high  price.  It 
is  easier  for  them,  as  experience  shows,  to  believe  a  stock 
is  cheap  when  it  is  relatively  dear,  than  to  believe  it  is 
cheap  when  it  is  more  than  cheap.  A  Stock  Exchange  op- 
erator or  group  of  operators  decides,  we  will  say,  that  a 
certain  stock  is  selling  cheap — that  is,  below  value.  Value 
means,  in  Stock  Exchange  speculation,  intrinsic  value,  plus 
future  value,  plus  the  additional  Stock  Exchange  value.  A 
large  holder  of  the  stock  begins  by  going  around  to  other 
large  holders.  Ownership  is  counted,  and  the  outstanding 
stock  in  public  hands  fairly  estimated. 

"The  first  necessary  detail  is  to  'tie  up'  in  a  pool  these 
known  holdings,  in  order  to  prevent  realizing  sales  by 
larger  interests.  If  such  large  holdings  cannot  be  kept  off 
the  market,  hands  are  joined  in  certain  direction,  and  a 
long  and  patiently  worked-out  plan  of  accumulating  the 
stock  at  low  prices,  before  tying  it  up,  is  devised.  This 
takes  the  form  of  manipulation  within  a  certain  range  of 
prices.     It  may  be  assisted  by  natural  stock-market  con- 


THE     ABC     OF     STOCK     SPECULATION.  175 

ditions,  which  encourage  sales  by  outsiders  at  a  sacrifice. 
Frequently  persistent  attacks  on  the  stock  by  the  people 
who"  wish  to  buy  it  are  undertaken,  which  bring  out  mis- 
cellaneous public  holdings,  and  which,  if  carried  suffi- 
ciently far,  dislodge  even  important  inside  holdings.  To 
accomplish  the  decline,  matched  orders  are  frequently 
used,  whereby  the  pool  really  sells  to  itself.  Large  offerings 
of  the  stock  are  also  continually  placed  on  the  floor  with 
no  takers,  resulting  in  the  gradual  lowering  of  commission- 
house  selling  limits,  and  the  securing  of  cheap  stock 
thereby. 

"The  question  of  borrowing  money  is  important.  A  pool 
can  rarely  do  the  whole  thing  with  its  own  capital.  It  is 
assumed  that  the  money-market  outlook  favors  a  stable 
condition,  for  it  is  idle  to  suppose  such  operations  would 
be  conceived  were  conditions  pointing  otherwise.  Money 
brokers  have,  of  course,  been  employed  by  the  house  hand- 
ling the  pool,  to  borrow  from  the  banks  large  amounts  of 
time  and  short-time  call  money,  termed  ^special  loans,'  on 
which  the  collateral  is  largely  to  be  the  security  in  ques- 
tion, and  on  which  loans  a  liberal  rate  is  paid  and  liberal 
margins  given. 

"The  'publicity  department'  must  also  have  been  cov- 
ered. Practically  all  important  pool  operators  keep  on 
hand  this  appendage  to  their  work.  The  gossip'  affecting 
the  stock  must  be  printed,  and  this  department  is  system- 
atized to  a  degree  few  suspect.  It  is  generally  in  charge  of 
a  man  intimately  connected  with  newspaper  channels,  cov- 
ering every  important  city,  if  need  be,  and  this  person  re- 
ceives a  large  compensation  for  the  duty  performed  of  dis- 


1T6  THE     ABC     OP     STOCK     SPECULATION. 

tributing  for  circulation,  when  the  managers  of  the  pool 
see  fit,  items  of  news  and  gossip  affecting  the  stock.  The 
'insiders'  being  in  the  pool,  every  item  of  news  is  care- 
fully bottled  up,  and  distributed  only  at  what  is  thought 
to  be  the  right  time.  The  need  for  this  will  be  apparent 
when  it  is  observed  that  explanation  must  be  made  for  ad- 
vances and  excuse  for  declines  in  all  manipulated  stocks. 
The  fact  that  insiders  and  the  j^ool  own  the  news,  so  tq 
speak,  and  can  thus  discount  its  effect  ahead  of  those  who 
get  it  through  'publicity'  channels,  involves  a  moral  point 
of  view  which  has  often  been  the  subject  of  Wall  Street 
discussion. 

"The  machinery  of  Stock  Exchange  work  varies  little. 
Orders  are  given  to  different  sets  of  brokers  from  time 
to  time  to  buy  the  stock,  sometimes  carefully  and  quietly, 
sometimes  by  openly  and  aggressively  bidding  for  it,  and 
vice-versa  on  the  selling  side.  Earely  is  one  broker  alone 
allowed  to  remain  conspicuous  on  either  side  for  any 
considerable  length  of  time.  All  these  transactions  are 
'cleared'  by  the  brokers  filling  the  orders;  that  is,  instead 
of  'giving  up'  the  names  of  their  principals  in  the  trades, 
they  take  in  and  deliver  the  stocks  themselves,  and  then 
receive  and  deliver  them  from  and  to  their  principals. 

"Market  conditions  now  being  favorable  to  the  'deal,' 
and  emission  of  favorable  news  facts  having  resulted  in 
public  interest,  the  commission-house  broker,  who  repre- 
sents the  'public,'  begins  to  be  in  receipt  of  many  requests 
for  opinion  on  the  stock  made  active.  The  commission- 
house  broker  is  a  pretty  good  judge  of  the  situation  gener- 
ally, and  has  spent  his  life  studying  values  and  watching 


THE     ABC     OF     STOCK     SPECULATION.  177 

manipulation.  He  thus  assists  in  the  operations  by  ad- 
vising purchase.  As  a  general  rule,  the  advice  falls  flat, 
and  few  orders  come  out  of  it.  But  the  pool  continues; 
they  are  at  present  really  buying  stock  and  selling  little. 
Some  of  these  are  actual  trades,  some  are  matched  orders, 
but  it  is  impossible,  even  for  the  brokers  in  the  crowd,  to 
tell  which  of  such  orders  they  may  be.  The  result,  how- 
ever, is  a  marked  stimulation  of  public  interest,  and  com- 
mission-house buying  orders  begin.  More  news  is  pub- 
lished, and  the  deal  becomes  public  talk. 

"When  this  condition  is  created,  the  stock  is  up  several 
points,  and  the  pool  begins  to  figure  on  selling.  The  ma- 
chinery of  the  publicity  department  is  then  worked  to 
its  utmost  extent,  and  the  following  morning  finds  a  gen- 
eral demand  for  the  stock  from  all  commission  houses. 
This  is  the  time  when  a  'widespread'  opening  is  figured  on. 
Orders  by  the  thousands  are  put  in  on  the  selling  side, 
distributed  to  many  brokers,  with,  of  course,  some  buying 
orders  also  put  in  to  a  limited  degree  to  'take  it  as  of- 
fered' at  the  opening.  The  'high  opening'  is  effected,  and 
stock  sold  by  balance  sufficient  to  warrant  pool  support  and 
renewed  buying,  after  the  overnight  public  orders  have 
been  filled.  Then  follows  bold,  aggressive  buying  by  the 
pool  in  large  quantities,  aided  by  matched  selling  orders, 
and  the  volume  of  the  business  done  attracts  attention 
everywhere,  and  leads  to  enormous  absorption  by  the 
public. 

"Given  favorable  conditions,  the  public  buying  thence- 
forward controls  the  market,  and  the  pool  places  only  'sup- 
porting' orders  in  the  stock  from  time  to  time,  when  out- 


178  THE     ABC     OF     STOCK     SPECULATION. 

side  interest  flags.  This  public  buying  will  continue  until 
it  has  carried  the  price  so  much  beyond  value  that  the 
pool  can  afford  to  liquidate  freely.  From  then  on,  the 
operation  proceeds  to  its  profitable  close,  the  various  offi- 
cial, semi-official,  and  'inside'  announcements  of  news 
and  suggestions  covering  the  outlook  in  the  immediate  and 
near  future — affecting  the  value  of  the  stock,  dividends  to 
be  paid,  bond  conversions,  new  alliances,  consolidations — 
are  the  only  necessary  machinery." 

Discussing  "manipulation,"  Mr.  Charles  H.  Dow  says: 

"In  a  broad  sense,  trading  on  the  Stock  Exchange  rep- 
resents the  operation  of  supply  and  demand  as  applied  to 
securities.  Ordinarily,  however,  a  comparatively  small 
part  of  the  business  is  done  by  investors.  The  larger  part 
is  the  outcome  of  professional  trading  and  of  the  manipu- 
lation that  is  carried  on  by  large  interests  to  accomplish 
desired  results. 

"Trading  in  stocks  can  ordinarily  be  divided  into  pro- 
fessional and  public  dealings.  There  is  a  great  difference 
between  the  two.  Professional  trading  includes  manipula- 
tion and  the  operations  of  those  who  make  trading  in 
stocks  a  considerable  part  of  their  daily  business.  Trad- 
ing by  the  public  covers  investment  business  and  a  form  of 
dealing  which  is  partly  speculative  and  partly  investment. 
The  professional  operator  trades  all  the  time.  Public 
trading  is  variable  and  very  uncertain. 

"The  two  extremes  in  the  market  are  occupied  by  man- 
ipulators who  either  wish  to  buy  or  to  sell  in  considerable 
quantity,  and  the  public  which,  in  the  end,  wishes  to  invest 
wisely.     The  manipulator,  therefore,  looks  to  the  public 


THE     ABC     OF     STOCK     SPECULATION.  179 

to  buy  the  stocks  which  he  wishes  to  sell,  or  to  sell  those 
which  he  wishes  to  buy.  A  large  proportion  of  all  man- 
ipulation is  aimed  at  the  public,  and  professional  traders 
are  merely  the  middlemen  who  try  to  take  profits  out 
of  the  movements  which  manipulators  appear  to  be  trying 
to  make. 

"Suppose  that  a  syndicate  finds  itself  with  a  profit  in 
the  form  of  $10,000,000  worth  of  stock.  The  way  to  con- 
vey this  profit  into  cash  is  to  sell  the  stock.  The  syndicate, 
therefore,  makes  an  arrangement  with  some  skilled  man- 
ipulator, who  undertakes  to  induce  the  public  to  buy  this 
stock.  He  begins  by  seeing  that  the  merits  of  the  case 
are  stated  as  fully  and  as  widely  as  possible. 

"Whether  the  stock  is  intrinsically  valuable  and  the 
enterprise  sound  or  unsound  makes  a  great  difference  as  to 
the  class  of  men  which  undertake  the  manipulation,  but 
it  makes  but  little  difference  as  to  the  methods  which  are 
employed  to  secure  public  buying.  In  any  event,  the  first 
thing  is  to  have  the  property  known  about  and  talked 
about.  The  way  to  obtain  this  result  is  to  have  the  stock 
do  something  which  makes  brokers  and  speculators  and 
writers  try  to  find  out  what  is  causing 'the  movements 
which  are  recorded  on  the  tape. 

"Manipulators  in  such  cases  usually  tell  friends  that 
the  stock  in  question  is  to  be  made  active  and  advanced. 
This  brings  buying  of  a  professional  class,  because  it  is 
understood  that  a  deal  of  the  magnitude  proposed  cannot 
be  accomplished  without  sustaining  the  market  for  the 
stock  for  a  considerable  time  during  which  trading  in  it 
will  be  comparatively  safe.     Manipulators  know,  further- 


180  THE     ABC     OF     STOCK    SPECULATION. 

more,  that  one  of  the  best  ways  of  getting  a  stock  talked 
about  is  to  have  people  tell  friends  that  they  have  made 
money  by  buying  it.  Accordingly,  there  is  almost  always 
money  to  be  made  with  a  minimum  of  risk  in  the  early 
stages  of  such  a  campaign. 

"The  manipulator  must  keep  the  stock  active,  buying 
and  selling  from  ten  to  twenty  thousand  shares  a  day  in 
order  to  keep  traders  confident  of  a  market  on  which 
they  can  sell,  if  at  any  time  they  become  alarmed.  It  is 
characteristic  of  the  public  to  buy  on  advancing  prices 
rather  than  on  declining  prices.  A  stock  which  is  to  be 
sold  is  therefore  kept  strong  and  advanced  moderately  if 
the  general  market  will  permit  this  to  be  done, 

"The  larger  the  manipulation,  the  larger  will  be  the 
volume  of  professional  trading,  and  the  greater  the  likeli- 
hood of  the  public  taking  an  interest  in  the  stock.  Usu- 
ally in  such  cases  the  public  buying  is  at  first  small;  then 
it  becomes  more  confident,  and  finally  there  is  full  confi- 
dence and  the  stock  is  rapidly  unloaded  upon  the  public 
buying.  Then  the  activity  dies  out,  professional  trading 
becomes  less,  and  the  public  is  satisfied  or  dissatisfied  with 
its  bargain,  as  the  case  may  turn  out. 

"This  occurs  to  a  greater  or  less  extent  in  the  market 
all  the  time.  There  is  always  some  large  interest  which 
would  like  to  have  the  public  buy  or  sell,  and  manipulation 
is  going  on  with  that  end  in  view.  Large  interests  know 
that  if  the  public  can  be  induced  to  trade  freely  in  stocks 
which  are  of  unquestioned  value,  they  can  generally  be  led 
into  other  stocks;  therefore,  an  attempt  is  often  made  to 
get  the  public  into  the  market  by  advancing  three  or  four 


THE     ABC     OF     STOCK     SPECULATION.  181 

leading  stocks.  If  the  public  comes  in,  the  market  is 
widened.  If  the  public  does  not  come  in,  the  manipulators 
discontinue  their  efforts  to  make  a  market  after  a  few 
days  and  wait  for  a  more  opportune  time. 

"The  rule  for  the  public  ought  to  be  essentially  the 
rule  which  is  followed  by  professional  traders.  When  a 
stock  is  made  active,  consider  it  first  with  reference  to  its 
value.  If  it  is  intrinsically  cheap,  it  can  ordinarily  bo 
traded  in  as  long  as  it  is  kept  active.  But  it  is  generally 
wise  to  sell  when  activity  ceases.  If  the  stock  is  apparently 
above  its  value,  a  good  deal  more  caution  ought  to  be  ex- 
ercised about  going  in,  and  stop  orders  should  be  used 
to  guard  against  severe  drops. 

"Generally  speaking,  manipulation  in  a  new  property  is 
for  the  purpose  of  selling;  in  an  established  property,  bull 
manipulation  is  usually  discounting  some  favorable  news 
which  insiders  are  holding  back.  Bear  manipulation  in 
perhaps  eighty  per  cent,  of  cases  is  the  discounting  of  some- 
thing which  is  unfavorable.  In  twenty  per  cent,  perhaps, 
it  is  for  the  purpose  of  accumulating  stock  with  reference 
to  a  succeeding  rise. 

"As  a  whole,  however,  bear  manipulation  is  founded  on 
knowledge  that  the  stock  under  treatment  is  intrinsically 
dear.  It  is  not,  as  a  rule,  good  judgment  to  buy  stocks 
which  are  under  attack  until  the  attack  ceases  and  there 
are  indications  of  a  rally  on  the  short  interest  which  may 
have  been  made  by  those  who  followed  the  decline.^' 

And  again  discussing  a  campaign  in  stocks,  Mr.  Dow 
says: 

"The  stock  market  alternates  between  periods  of  activ- 


182  THE     ABC     OF     STOCK     SPECULATION, 

ity  and  periods  of  rest.  Its  periods  of  activity  are  usually 
started  by  manipulation  and  continued  by  a  mixture 
of  manipulation  and  public  buying.  Professional 
traders  and  the  public  usually  try  to  follow  the  lead  of 
some  individual  or  clique  which  is  apparently  advancing 
some  particular  stock  or  stocks. 

"The  main  difference  between  manipulators  and  general 
traders  is  that  the  manipulator  endeavors  to  take  advan- 
tage of  conditions  which  he  thinks  will  exist  in  the  future. 
He  believes  that  the  condition  of  money  or  change  in  the 
value  of  a  particular  stock  or  something  else  will  cause  a 
given  security  to  be  worth  more  three  months  hence  than 
it  is  now.  He  buys  stocks  quietly  and  then  advances  the 
price  slowly  or  rapidly,  as  the  case  may  be,  with  the  ex- 
pectation that  the  public  will  take  his  stock  off  his  hands 
when  it  sees  what  he  saw  at  the  beginning.  Whether  the 
public  does  this  or  refuses  to  do  it  determines  the  success 
of  the  campaign. 

"In  a  majority  of  cases,  a  well  sustained  advance  sup- 
ported by  large  trading  will  bring  enough  outside  buying 
to  enable  a  manipulator  to  unload  a  substantial  line  of 
stock.  The  speculative  public  always  buys  on  advances 
and  seldom  on  declines,  in  which  respect  it  differs  from 
the  investing  public  which  buys  on  declines  and  sells  on 
advances.  One  of  the  most  skillful  manipulators  in  Wall 
Street  says  that  any  stock  possessing  merit  and  having 
some  influential  fact  to  be  made  the  basis  of  a  campaign 
can  be  marketed  at  an  advance  in  price,  if  the  manipulat- 
ing interest  is  willing  to  pay  the  cost  of  such  a  campaign, 
which  would  perhaps  average  $250,000. 


THE     ABC     OF     STOCK     SPECULATION.  183 

"This  cost  is  chiefly  applied  to  the  creation  of  a  mar- 
ket. The  rules  of  the  Stock  Exchange  do  not  permit  A  to 
tell  B  to  buy  stock  from  C  at  a  given  price,  but  it  does  not 
prohibit  A  from  telling  B  to  buy  10,000  shares  of  a  given 
stock  and  at  the  same  time  telling  C  to  sell  10,000  shares 
of  the  same  stock.  The  results  of  such  an  operation  would 
show  that  many  brokers  had  participated  in  the  trading, 
through  a  wish  to  take  either  the  buying  or  the  selling 
side,  and  that  on  the  whole  the  market,  although  artificial 
in  one  sense,  had  been  legitimate  in  the  sense  that  anybody 
had  a  chance  to  step  in  and  buy  or  sell  at  the  price  es- 
tablished. 

"A  bull  campaign  in  the  market  is  a  far  bigger  under- 
caking  than  a  campaign  in  one  stock,  because  many  stocks 
have  to  be  moved.  On  the  other  hand,  it  is  sometimes 
easier  because  it  invites  co-operation  from  many  sources, 
and  sometimes  a  very  small  amount  of  encouragement  in 
a  stock  is  sufficient  to  induce  its  friends  to  do  all  that 
is  required  to  promote  an  active  speculation. 

"The  general  progress  in  a  bull  market  is  for  the  manip- 
ulating interest  to  take  two  or  three  prominent  stocks,  and 
by  making  them  active  and  higher  attract  attention  to  the 
fact  that  a  campaign  has  been  started.  It  is  customary 
to  take  stocks  of  the  best  class,  in  which  there  is  a  large 
investment  interest  and  where  the  supply  of  floating  stock 
liable  to  come  on  the  market  is  known  not  to  be  large. 
This  is  why  St.  Paul  is  so  often  used  as  a  leader,  and 
why  closely  held  stocks  like  Eock  Island,  Northwest  and 
others  of  that  class  are  frequently  advanced  materially  at 
the  beginning  of  a  bull  campaign. 


184  THE     ABC     OF     STOCK     SPECULATION. 

"After  stocks  of  this  kind  have  been  put  up  from 
5  to  10  points,  it  is  customary  to  shift  the  trading  to 
stocks  of  the  middle  class  on  the  idea  that  the  public  will 
not  buy  where  there  has  been  very  large  advances  or  where 
prices  are  very  high,  but  will  buy  the  cheaper  stocks,  even 
if  they  are  intrinsically  dearer.  After  stocks  of  this  kind 
have  been  carried  up  a  few  points,  it  is  customary  to  take 
up  stocks  of  still  lower  price.  It  was  considered  for 
many  years  that  when  manipulators  moved  Erie,  the  end 
of  a  period  of  rising  prices  was  at  hand,  because  Erie  was 
regarded  as  of  next  to  no  value  and  putting  it  up  was 
considered  diversion  of  the  public,  while  other  stocks  were 
being  sold. 

"In  a  prolonged  bull  campaign,  after  the  manipulators 
have  moved  the  low  priced  stocks,  they  sometimes  go  back 
and  move  the  others  all  over  again,  following  the  same  or- 
der— the  high  priced  stocks  first,  stocks  of  the  middle  class 
next,  and  then  the  cheapest  on  the  list." 


THE     ABC     OF     STOCK    SPECULATION.  185 

CHAPTER  XXXI. 

The  Eecord  op  Five  Panics. 

Recorded  below  are  the  movements  of  a  few  active 
stocks  in  the  panics  of  1873,  1884,  1893,  1895  and  1901. 
The  figures  include  the  high  prices  prevailing  shortly  be- 
fore the  panic,  in  §ome  cases  those  the  day  previous,  and 
in  others  several  days  prior  thereto.  The  low  prices  are 
the  low  points  in  the  panic.  The  recovery  given  is  to 
prices  established  within  a  week  or  the  low  point  in  the 
panic,  coming  in  some  cases  within  a  few  days  and  others 
not  until  nearly  a  week  afterwards. 

We  are  accustomed  to  think  of  the  panic  of  1873  as  a 
very  serious  event.  It  was  sufficiently  serious  to  compel 
the  closing  of  the  Stock  Exchange,  but  the  decline  outside 
of  Lake  Shore  and  Western  Union,  seems  singularly  small 
in  view  of  losseS  which  have  been  seen  since.  The  panic  it- 
self was  the  culmination  of  a  feverish  market  wKich  had 
lasted  all  the  week,  the  final  break  coming  on  Saturday. 
The  average  decline  in  that  panic  for  nine  active  stocks 
was  10.33  per  cent.    Figures  follow: 

1873   Panic.  High.  Low.  Decline.  Recov'y. 

N.  Y.  Central 95  89  6  6 

Erie    561/8  503^  53/8  23/8 

Lake   Shore 88  68  20  11 

Wabash    50  421/2  71/2  7 

Rock    Island 95  86  9  10% 

St.    Paul 371/2  30  71/2  51/2 

Lackawanna    921/2  86  6I/2  71/8 

Western  Union 76  54l^  213^  19% 


186  THE     ABC     OF     STOCK     SPECULATION. 

The  panic  of  1884  reflected  a  larger  average  movement 
of  prices,  the  losses  of  May  13-16  running  from  8  to  15 
points.  The  panic  proper  covered  two  days,  while  the 
recovery  for  ten  stocks  amounted  to  about  five-eighths  of 
the  loss.     Details  follow: 

1884  Panic.  High.  Low.  Decline.  Eecov'y. 

Lake  Shore 94  81  13  8% 

Eock    Island 1161^  1091/,         6%  614 

St.    Paul 77  65  12  7% 

Burlington 118  II414         3%  3% 

Louisville 44  30%  U%  5 

Missouri  Pacific 80  65  15  71^ 

Union  Pacific 50  411/2         8I/2  3% 

Western  Union 60  513^         814  5% 

The  panic  of  1893  was  not  very  severe  in  the  extent 
of  the  losses.  The  average  fall  in  13  stocks  was  7.34  per 
cent,  and  in  only  a  few  cases  did  the  loss  exceed  ten 
points.  In  the  leading  stocks  quoted  the  losses  were  from 
7  to  9  points,  while  the  recovery  was  in  nearly  every  case 
larger  than  the  panic  decline. 

1893  Panic.  High.       Low.  Decline.  Eecov'y. 

Burlington 74  6914  ^%  103^ 

St.    Paul 53  463/8  5%         9 

Eock  Island 58  53  5             814 

Louisville    53  471/2  71/2  10% 

Missouri   Pacific 23  16%  6I/2         6I/2 

Sugar   73  663^  6%         83/8 

Chicago   Gas 53  431/2  91/2         8% 

Western  Union 75  671/2  71/2  lO^/g 

The  Venezuela  panic  of  1895  was  about  equal  in  inten- 
sity to  the  panics  of  1873  and  1884.     The  average  of  15 


THE     ABC     OF     STOCK  SPECULATION.                  187 

stocks  fell  9.72  per  cent,  and  a  considerable  proportion 
of  the  losses  exceeded  10  points.  The  recovery  was  nor- 
mal, about  two-thirds  the  amount  of  the  decline. 

1895  Panic.                     High.  Low.  Decline.  Eecov'y. 

Burlington    19978  178           217/8       141/2 

St.    Paul 723/8  6OI/2       117/8         7y2 

Rock  Island 721/2  59           I31/2       10 

N.   Y.    Central 98  901/^         71/2         71^ 

Louisville 491/8  39           lOi/g         6i/4 

Missouri   Pacific 27%  I91/2         SJ/g         6i^ 

Jersey    Central IO51/2  93           I21/2         8l^ 

Sugar   1001/2  92             8I/2         7% 

Chicago   Gas 68I/2  571/9       11             7% 

Western  Union 8814  821/2         53^4         4l^ 

The  following  shows  the  fluctuation  in  a  few  stocks 
in  the  panic  of  1901 : 

1901  Panic.                     High.  Low.  Decline.  Eecov'y. 

Atchison    com 901/4  43           471^       33 

Burlington    199%  178           21%       I41/2 

St.    Paul 188  134           54           29i/o 

Eock    Island 169%  125           44%       38 

Louisville 111%  76           351/2       273^ 

Manhattan   1313^  83           483^       323^ 

Missouri   Pacific II634  72           443^       36I/2 

N.   Y.    Central 170  140           30           15 

Union   Pacific 133  76           57           471/2 

Amalgamated    Copper...    1281/,  90           38I/2       32 

Tobacco    1307/8  99           31%       253^ 

People's  Gas II91/2  98I/2       21           I314 

U.  S.  Steel  com 55  24           31           22 

The   declines    are   amazing   when   compared   with   the 
losses  in  other  panics.     Drops  exceeded  40  points  each  in 


188  THE     ABC     OF     STOCK    SPECULATION. 

Atchison,  St.  Paul,  Eock  Island,  Manhattan,  Missouri 
Pacific  and  Union  Pacific.  The  figures  showing  the  high 
point  were  in  some  cases  a  week  or  more  before  the  low 
point,  but  the  drop  as  between  the  close.  May  8th,  and  the 
low  point.  May  9th,  covered  in  most  cases  a  large  propor- 
tion of  the  total  decline. 

The  recovery  was  equally  noteworthy.  Union  Pacific 
fell  57  points  and  rose  471/2  points  within  one  week.  Mis- 
souri Pacific  fell  44%  points  and  recovered  361^  points 
in  the  same  time.  Other  changes  were  almost  as  pro- 
nounced, going  to  show  that  in  the  extent  of  the  fluctua- 
tions the  panic  this  month  was  not  to  be  named  in  the  same 
breath  with  any  panic  record  in  the  past. 

It  came  and  went  so  swiftly  as  to  leave  onlookers  al- 
most dazed.  The  speed  and  the  extent  of  the  recovery  was 
all  that  saved  the  panic  from  being  a  financial  catas- 
trophe. 

A  long  train  of  ills  followed  the  smaller  declines  in 
panics  past.  The  ills  would  have  been  a  calamity  had  the 
low  prices  of  May  9,  1901,  continued  for  twenty-four 
hours. 

The  fluctuations  of  the  May  9  panic  show  that  while 
investment  stock  was  not  greatly  disturbed  and  while 
commission  houses  proved  to  be  strong  enough  to  endure 
the  strain  without  failure,  the  large  trading  which  had 
been  the  feature  of  the  market  that  year  resulted  in  a  rush 
to  sell  which  carried  prices  far  below  what  the  decline 
would  have  been  under  normal  selling  pressure. 

In  other  words,  a  great  market  represented  by  transac- 
tions of  from  two  to  three  million  shares  a  day,  carries 


THE     ABC     OF     STOCK     SPECULATION.  189 

with  it  the  possibility  of  movements  in  prices  as  much 
greater  than  normal  as  is  the  volume  of  trading  greater 
than  normal.  There  is  a  relation  between  the  volume  of 
business  and  the  movement  of  prices.  Great  activity 
means  great  movements  whenever  the  normal  balance  be- 
tween buyers  and  sellers  is  violently  disturbed. 


190  THE     ABC     or     STOCK     SPECULATION. 


CHAPTER  XXXII. 
End  of  Several  "Booms.'' 

The  1903  autumn  collapse  of  numerous  stocks,  inflated 
in  the  progress  of  the  crazy  "boom"  of  that  season  to 
the  highest  prices  on  record,  suggested  Heminiscences, 
There  are  many  of  such  reminiscences  in  point. 

The  first  half  of  1881  was  a  period  much  resembling  the 
first  four  months  of  1901.  Burlington  and  Quincy  had 
risen  221/2  points,  St.  Paul  28,  Northwestern  23,  Lake 
Shore,  1734,  Louisville  591/2,  New  York  Central  271/2, 
Panama  Railway  60,  Western  Union  57.  This  is  the  ac- 
count of  the  period  by  a  conservative  reviewer  of  the  time: 

"In  the  present  era,  consolidation  is  the  word,  and 
nothing  in  the  financial  world  has  now  such  charms  for 
investors  and  capitalists  as  this  magic  term.  Let  the  stocks 
of  two  non-competing  companies  each  be  selling  at  20, 
with  few  buyers;  let  a  consolidation  be  proposed,  share  for 
share,  and  immediately  the  stocks  are  run  up  to  30 — 40 — 
50 — as  the  case  may  be.  Add  one  more  element  to  the 
transaction — water — in  the  shape  of  a  stock  distribution  of 
100  per  cent,  or  more,  and  the  original  amount  of  stock, 
selling  for  only  20,  is  found  to  be  worth  par.,  This  il- 
lustration may  present  an  extreme  view  of  the  case  in  the 
details  mentioned,  but  the  general  fact  is  indisputable  that 
a  large  number  of  stocks  on  roads  that  have  never  paid  a 


THE     ABC     OF     STOCK     SPECULATION.  191 

dividend,  nor  have  any  prospect  of  paying  one  for  some 
years  to  come,  are  now  selling  at  60  to  100,  which  last 
year  were  considered  dear  at  20  to  40." 

There  was  a  somewhat  familiar  ring  to  the  description 
when  applied  to  markets  of  1901-2. 

President  Garfield  was  shot  on  July  2.  A  railroad  rate- 
waF  broke  out  almost  the  next  week;  following  which, 
the  hot  winds  ruined  the  corn  crop.  All  these  occurrences 
were  described,  as  usual,  as  "thunderclaps  from  a  clear 
sky."  The  markets  collapsed,  with  intervals  of  support 
from  "inside  interests."  By  autumn,  stocks  were  down 
as  a  rule  10  to  20  points,  the  intervening  decline  having 
been  much  more  severe. 

In  most  respects,  1882  resembled  1902  exactly  as 
1881  resembled  1901.  The  "boom"  of  1882  oc- 
curred later  in  the  year.  Up  to  midsummer,  advances 
of  more  than  10  points  or  thereabouts  were  not  nu- 
merous. September's  high  level,  however,  showed  up- 
ward movements  such  as  33  in  New  Jersey  Central,  24  in 
St.  Paul,  34  in  Lackawanna,  23  in  Illinois  Central,  and  58 
in  Manitoba.  From  then  until  November,  prices  hung 
fire;  they  even  scored  "marked  advances,"  with  the  help 
of  rumors  frooi  Mr.  Vanderbilt.  On  November  18  money 
was  described  as  "easy  and  in  a  normal  condition."  On 
Monday,  November  20,  it  rose  to  20  per  cent.;  it  touched 
30  later  on.  The  surplus  bank  reserve  had  vanished,  and 
a  deficit  of  $3,000,000  took  its  place.  It  was  said  in  a 
contemporary  journal  on  November  25: 

Stock  market  fluctuations  have  been  so  violent  that  feel- 
ing has  almost  verged  on  panic.     The  two  points  are  the 


192  THE    ABC     OF     STOCK     SPECULATION. 

railroad  war  and  the  condition  of  the  steel  trade.  Produc- 
tion of  steel  rails  was  enormously  stimulated  by  rapid  rail- 
road building  and  the  high  tariff,  and  profits  of  manufac- 
turers for  a  time  were  fabulous.  It  was  a  foregone 
conclusion  (this  was  written  long  after  the  event)  that 
mills  could  not  keep  up  these  profits. 

They  certainly  did  not  keep  them  up,  and  depression 
was  very  severe,  with  a  number  of  leading  mills  closed 
down  during  the  autumn.  The  close  of  the  year  showed 
some  such  declines  from  the  earlier  autumn  prices  as  19  in 
Burlington  and  Quincy,  23  in  Lackawanna,  11  in  New 
York  Central,  18  in  Union  Pacific,  22  in  Manitoba,  23  in 
Pullman,  25  in  Oregon  Navigation.  This  was  the  last  of 
the  "big  booms"  of  the  period. 

Passing  over  a  long  series  of  minor  "booms,"  such  as 
those  of  1885,  1886,  1890,  and  1895— nearly  all  of  which 
were  upset  by  the  money  market's  rebellion  against  the  ex- 
cesses of  the  speculators — we  come  to  1899.  The  famous 
"Flower  boom"  was  one  of  the  most  hollow  in  the  entire 
series.  It  now  appears  laughable  that  the  hopes  of  a  great 
market  should  have  been  pivoted  on  such  a  stock  as  Brook- 
lyn Kapid  Transit,  but  so  it  was.  The  genial  atmosphere 
of  the  commission  office  where  stock- jobbing  "tips"  were 
distributed  to  the  unwary  had  its  effect  on  the  whole  com- 
munity and  on  the  whole  stock  list.  "Brooklyn"  itself 
rose  not  quite  60  points;  but  there  were  other  advances 
like  the  25-point  rise  in  Burlington,  New  Jersey  Central's 
advance  of  25,  Lackawanna's  22,  Manhattan  Elevated's  36, 
Metropolitan's  81,  and  JNew  York  Central's  20.  The  chief 
manipulator  died  suddenly  on  May  13.    None,  or  practic- 


THE     ABC     OF    STOCK    SPECULATION.  193 

ally  none,  of  the  wind-bag  stocks  were  found  in  his  vaults 
by  his  executors.  He  at  least  had  sold  out  what  he  had; 
but  the  public  was  left  to  sell  the  rest.  The  bell-wether 
stock  of  the  entire  list  fell  37  points  within  a  day,  and 
has  never  touched  its  high  price  since.  Manhattan  Ele- 
vated dropped  off  28  points  of  its  recent  inflated  price, 
Metropolitan  54,  and  the  standard  railway  shares  some 
15  to  20  points.  The  new-fledged  industrials,  which  had 
shared  in  the  happy  movement,  tumbled  in  similar  propor- 
tion. The  interesting  fact  of  the  "boom"  of  1899  was  that 
the  money  market  played  little  part  in  tripping  up  the 
Stock  Exchange. 


194  THE     ABC     OF     STOCK     SPECULATIOIT. 

CHAPTER  XXXIII. 
Dealing  in  Unissued  Stocks. 

Trading  in  unissued  securities,  in  advance  of  their 
actual  distribution,  started  in  this  country  in  connection 
with  the  issue  of  the  new  Government  4  per  cent,  bonds, 
which  were  bought  by  the  Morgan-Belmont  syndicate  on 
February  19,  1895.  A  somewhat  similar  practice  had  pre- 
viously been  in  vogue  in  Europe,  having  originated  in  the 
desire  of  investors  to  arrange  for  the  purchase  of  bonds  or 
stocks  in  advance,  when  new  issues  were  expected  to  come 
out.  They  naturally  appealed  to  their  banker  to  put 
through  the  transaction,  and  it  came  to  be  a  common  thing 
to  tix  upon  the  price  which  investors  were  to  pay.  This 
naturally  led  to  trading  in  contracts  for  the  new  securities, 
based  upon  the  estimated  value  which  different  persons 
thought  they  were  worth. 

Messrs.  Morgan  and  Belmont  had  so  arranged  the  terms 
for  the  flotation  of  the  $62,315,000  of  new  Government  4s 
— so  they  thought — that  those  placed  abroad  would  not 
be  resold  to  this  country  right  away,  which  would  tend  to 
defeat  the  purpose  for  which  they  were  issued.  But  the 
foreign  bankers  were  experts  at  disposing  of  securities  be- 
fore they  were  issued.  Before  the  Secretary  of  the  Treas- 
ury had  put  out  the  first  lot  a  large  number  had  changed 
hands  at  a  sharp  advance  in  price,  and  in  many  instances 
the  original  buyers  neyer  saw  the  securities  which  they 


THE     ABC     OF     STOCK     SPECULATION.  195 

had  turned  over.  What  they  were  really  dealing  in  were 
contracts  to  deliver  United  States  Government  4s,  "when, 
as,  and  if  issued."  The  syndicate  got  the  bonds  at  104% 
and  offered  them  to  the  public  at  112^  on  the  next  day. 
On  February  25,  only  5  days  after  the  offer  to  the  public, 
trading  in  the  new  bonds,  "^Vhen  issued,"  began  in  the 
unlisted  department  of  the  Stock  Exchange,  the  initial 
sale  being  at  118%,  or  5%  above  the  price  at  which  they 
were  offered  to  the  public.  The  price  ran  up  to  119%  be- 
fore the  end  of  the  week.  On  March  14,  when  the  first 
bonds  ajDpeared,  the  price  did  not  go  above  120. 

While  there  was  much  of  a  speculative  character  about 
the  trading  in  the  new  bonds,  most  of  the  buying  above 
118,  before  the  securities  were  issued,  represented  the  exe- 
cution of  orders  for  investors  who  had  failed  to  get  any 
when  they  were  offered  at  112%,  and  who  thought  they 
might  have  to  pay  still  higher  prices  after  the  certificates 
came  out.  In  this  case  they  did  not  gain  much  by  buying 
the  "when  issued"  contracts. 

The  trading  in  Government  bonds  before  issued  opened 
up  to  American  traders  visions  of  great  possibilities  in  get- 
ting an  early  start  in  new  securities,  and  when  the  reor- 
ganizations of  Northern  Pacific,  Eeading,  Atchison,  and 
other  railroad  properties  came  along  a  little  later  deal- 
ing in  contracts  became  a  common  thing  on  the  Broad 
Street  curb.  For  a  long  time  the  foreign  bankers,  who  are 
experts  in  figuring  out  the  niceties  of  "arbitrage"  and  of 
exchange  transactions,  did  most  of  the  business  in  the 
"when  issued"  contracts.  One  of  their  number  says  that 
profits  of  from  $25,000  to  $50,000  v/ere  sometimes  made  in 


196  THE     ABC     OF     STOCK     SPECULATION. 

a  single  security  before  the  certificates  came  out.  They 
made  large  amounts  out  of  Northern  Pacific,  but  some  of 
them  came  out  with  a  small  loss  on  Atchison  bonds  and 
stocks,  because  they  had  made  a  mistake  in  not  allowing 
enough  margin  for  interest.  Interest  is  a  very  important 
item.  The  method  of  operators  consists  in  buying  the 
old  shares  and  selling  the  prospective  new  ones  against  the 
former.  In  determining  the  price  at  which  to  sell  the 
new  the  interval  of  time  before  the  new  are  issued  is  taken 
into  consideration,  since  interest  must  be  paid  on  the 
shares  which  have  been  bought,  and  they  must  be  carried 
until  they  can  be  exchanged.  The  trouble  in  the  case  of 
the  Atchison  was  that  the  new  securities  did  not  come  out 
until  a  later  time  than  had  been  expected. 

The  important  part  which  contracts  for  securities  "when 
issued"  may  play,  was  perhaps  best  illustrated  by  the  first 
transactions  in  those  of  the  United  States  Steel  Corpora- 
tion on  the  Broad  Street  curb.  These  prices  really  deter 
mined  the  movements  of  Federal  Steel,  Steel  and  Wire, 
and  other  subsidiary  shares  on  the  Stock  Exchange.  For 
several  days  it  was  not  known  just  what  the  old  shares 
ought  to  be  worth  in  the  exchange  for  new,  and  they  fluctu- 
ated wildly  until  the  relationship  was  determined  by 
watching  the  prices  of  United  States  Steel  shares  when 
issued.  The  common  started  on  the  curb  at  38,  and  the 
preferred  at  82%  in  the  second  week  of  March,  last  year. 
That  an  investor  benefited  by  buying  before  issued  seemed 
clear  from  the  fact  that  when  the  new  shares  came  out 
and  they  were  introduced  on  the  Stock  Exchange,  on 
March  28,  the  common  started  off  at  42%  and  the  pre- 


THE     ABC     OF     STOCK     SPECULATION.  197 

ferred  at  92%.  From  the  standpoint  of  the  person  who 
wanted  to  buy  the  old  shares  and  sell  the  new  against 
them  it  was  a  difficult  task,  because  of  the  restrictions 
placed  upon  the  exchange  of  securities.  Some  of  the 
traders  tried  a  little  of  what  was  termed  "arbitraging" 
between  the  Stock  Exchange  and  the  curb,  figuring  out,  as 
they  thought,  a  profit  of  4  or  5  points,  but  they  gave  it 
up  when  they  realized  how  completely  the  syndicate  con- 
trolled the  situation. 

The  dangers  sometimes  incident  to  trading  in  unissued 
securities  are  illustrated  by  the  San  Francisco  bond  case 
(1902)  and  that  of  the  United  States  Steel  bonds,  which 
it  was  proposed  to  issue,  partly  for  the  retirement  of  pre- 
ferred stock  and  partly  for  betterments.  Syndicate  agree- 
ments provide,  as  a  rule,  that  the  participants  shall  take 
their  proportion  of  the  new  securities  issued,  and  find  a 
way  to  dispose  of  them.  It  has  been  a  common  habit  for 
syndicate  members  to  make  contracts  for  the  sale  of  the 
securities  Svhcn,  as,  and  if  issued/'  so  as  to  get  them 
off  their  hands  as  soon  as  possible.  In  the  case  of  most 
of  the  companies  promoted  or  reorganized  by  Mr.  Morgan, 
the  syndicate  members  were  expected  to  take  their  pro- 
portion of  the  securities,  unless  it  was  specifically  agreed 
that  the  managers  were  to  dispose  of  them.  No  negotiable 
certificates  were  issued  permitting  of  the  transfer  of  sub- 
scriptions, as  in  the  case  of  the  San  Francisco  Street 
Eailway  Company,  financed  by  Brown  Brothers  &  Co. 
The  subscriptions  of  the  latter  are  dealt  in  on  the  curb; 
exactly  like  stocks. 

The  trouble  in  the  case  of  the  'Frisco  bonds  doubt- 


198  THE     ABC     OF     STOCK     SPECULATION. 

less  arose  from  the  fact  that  the  agreement  provided  that 
the  members  should  take  the  stock  to  which  they  were  en- 
titled. They  might  also  be  compelled  to  take  the  new 
bonds  unless  the  bankers  were  able  to  sell  them  to  better 
advantage — or  such  part  as  the  bankers  did  not  sell.  It 
was  possibly  inadvertence  on  the  part  of  the  subscribers 
that  caused  them  to  sell  the  new  'Frisco  bonds,  not  know- 
ing whether  they  would  have  the  certificates  to  deliver ;  or, 
they  may  have  thought  there  would  be  "enough  to  go 
around"  when  $20,00!),000  were  issued.  The  small  amount 
of  San  Francisco  bonds  that  came  out  at  the  start,  as 
well  as  the  possibility  that  only  $50,000,000,  instead  of 
$250,030,000  of  United  States  Steel  bonds  might  have 
been  issued,  illustrate  two  of  the  dangers  that  may  arise 
from  selling  securities  in  advance.  In  the  one  case  a 
temporary  scarcity  rendered  it  possible  to  run  the  price 
up  to  a  fictitious  figure,  assuming  that  the  contract  was 
literally  enforced  which  compelled  the  seller  to  deliver 
them  the  moment  they  were  issued.  In  the  second  in- 
stance, a  smaller  issue  of  United  States  Steel  bonds  would 
render  it  necessary  for  the  seller  to  deliver  a  really  more 
valuable  security  than  he  thought  he  had  sold,  and  he 
might  have  to  take  a  loss. 

Of  course,  there  is  always  the  risk  that  plans  may  be 
changed  and  the  securities  will  not  be  issued  at  all.  A 
notable  instance  which  caused  quite  an  uproar  was  the 
announcement  of  a  new  issue  of  India  stocks  by  the  Brit- 
ish Government  some  years  ago.  These  were  extensively 
traded  in  "when  issued,"  but  the  Government  changed  its 
mind,  and  all  of  the  transactions  had  to  be  declared  off. 


THE    ABC    OF     STOCK    SPECULATION,  199 

CHAPTEE  XXXIV. 

The  Tipster's  Point  of  View. 

The  stock  market  from  the  tipster's  point  of  view  is  not 
uninteresting.  As  a  guide,  however,  he  is  invariably  less 
valuable  than  an  honest  broker,  and  is  usually  very  clever 
in  "calling"  market  movements  after  they  have  run  their 
course. 

The  following  "study"  of  stock  speculation  is  the  work 
of  an  advertising  tipster,  and  the  reader  will  be  his  own 
judge  of  its  value. 

WALL     STREET'S     GREAT     GAME. 

Over  90  per  cent,  of  the  transactions  on  the  Exchange  are  purely  specula- 
tive— mere  betting  on  quotations.  So,  likewise,  90  per  cent,  of  the  fluctua- 
tions are  based  on  manipulation,  and  not  on  the  values  of  the  properties  or 
outside  conditions.  Good  or  bad  crops  have  a  very  close  relationship  with 
the  country's  actual  prosperity,  and  should  be  the  paramount  factor  in 
stock  market  values;  but  the  Insiders  are  supreme  in  Wall  Street,  and 
manipulate  prices  up  and  down  without  much  regard  for  crops,  earnings  or 
any  outside  factors.  Nobody  can  shut  his  eyes  to  the  fact  that  In  a  bull 
market  (that  is,  when  insiders  are  long),  stocks  go  up  in  the  face  of  bad 
news,  and  in  a  bear  market  (insiders  short),  prices  go  down,  no  matter  how 
rosy  the  outlook.  Every  extended  movement  is  planned  in  advance  and 
controlled  throughout  by  the  shrewdest  financial  generals  in  the  world.  They 
know  the  actual — not  the  published — conditions  of  the  properties  whose 
stocks  are  to  be  handled.  They  know  when  natural  conditions  warrant  a 
bull  or  a  bear  campaign.  They  leave  nothing  to  chance,  but  their  trump 
card   is  the  weakness   of  human  nature. 

When  the  plans  have  been  arranged  for  a  bull  campaign,  or  extended 
upward  movement,  every  sort  of  bear  argument  imaginable  Is  used  to  induce 
the  public  to  sell;  elections,  war  scares,  stringent  money,  damaged  crops, 
gold  exports,  etc.,  etc.,  are  resurrected  and  used  effectively  year  after  year. 
Meanwhile,  the  insiders  are  quietly  accumulating  stocks  and  checking  every 
advance  at  certain  figures.  Finally,  when  all  is  ready,  and  the  vast  majority 
of  speculators  bearish,  and  declines  seem  inevitable,  the  bull  market  com- 
mences— often  upon  the  actual  happening  of  some  anticipated  bad  news.     The 


200  THE     ABC     OF     STOCK     SPECULATION. 

advance  Is  at  first  very  gradual;  some  stocks  rise,  others  remain  stationary, 
while  a  break  Is  made  In  one  or  two,  to  encourage  the  bears  In  putting  out 
more  "short  lines."  Presently  the  "leaders"  advance  more  rapidly,  and 
the  others  begin  to  move  up.  Each  stock  has  Its  Individual  range  and  peculi- 
arity In  moving,  though  toward  the  end  of  a  campaign  those  stocks  which 
have  been  lagging  behind  come  forward  with  a  rush.  The  Importance,  there- 
fore, of  confining  your  attention  to  the  leaders  during  the  first  half  of  a 
campaign,  can  readily  be  seen.  The  money  made  on  them  can  bo  transferred 
to  the   "sDeeialties"   before  the  latter  have  had  their  advance. 

During  all  this  time  there  have  been  thousands  of  fluctuations,  like  surface 
waves,  but  the  tide  is  on  the  flood  and  prices  steadily  rise.  Every  one  bo- 
comes  enthusiastic  over  Improving  business.  The  "sneaking"  bull  market 
has  developed  Into  a  "creeping"  bull  market  and  the  "lambs"  are  at  last 
making  money.  Finally  there  comes  a  grand  rush  to  bu.r,  accompanied 
with  great  excitement  and  the  wildest  optimistic  rumors.  Enormous  quanti- 
ties of  stocks  are  handled,  and  this  Is  the  finish,  for  a  time,  at  least,  of  the 
bull  campaign.  Insiders  are  "unloading";  and  although  newspapers,  financial 
writers,  news  bureaus,  and  every  bull  artifice  that  can  be  devised,  are  used 
to  "jolly"  the  public  Into  buying,  though  everything  looks  rosy  and  there 
is  not  a  cloud  In  the  financial  horizon,  the  market  comes  to  a  stand.  Spite 
of  good  news  prices  sag.  Gradually  .but  surely  and  with  many  false  upward 
starts,    the   market    falls. 

Once  the  Insiders  have  distributed  their  stocks,  absolutely  nothing  can 
keep  prices  up.  Before  long,  excuses  are  found  to  force  down  the  market; 
and  then  the  same  old  game  is  played  over  again.  It  all  resolves  Itself  Into 
two  grand  divisions:  Accumulation — or  buncoing  marginal  and  investment 
owners  out  of  their  stocks  at  less  than  actual  value;  and  Distribution — or 
selling  the  same  stocks,  by  means  of  false  pretenses,  at  vastly  more  than 
actual  value. 

The  details  are  changed,  but  the  same  general  tactics  are  employed  year 
after  year.  The  lambs  never  learn  to  buy  stocks  when  everything  looks 
darkest.  They  never  learn  that  a  bull  campaign  begins  In  gloom  and  ends 
In  glory. 

POOL     METHODS. 

Human  nature  Is  such  that  it  is  almost  impossible  to  buy  stocks  at  the 
bottom,  with  nothing  but  bad  news  pouring  in.  It  is  still  harder  to  sell  at 
the  top  when  the  market  looks  strong  and  only  goods  news  is  heard,  and 
personal  friends  tell  you  of  some  Insider  who  has  assured  them  of  a  15  or 
20  points  advance  In  such  and  such  a  stock.  People  generally  buy  at  these 
times.  The  manipulators'  game  Is  to  play  on  this  phase  q^  human  nature, 
and  they  pull  the  wires  so  as  to  get  everybody  full  of  financial  optimism 
just  at  the  time  when  they  are  ready  to  sell.  Surely  anyone  can  see  that 
the  big  fellows  are  not  here  for  their  health,  or  for  glory,  but  to  make 
money,  and  the  largest  amount  possible,  with  absolute  disregard  of  whose 
pocket  It  comes  out  of.  SOMEBODY  must  lose  the  money  which  they  make. 
See  to  It  that  YOU  are  not  one  of  those  somebodies. 


THE     ABC     OF     STOCK    SPECULATION.  201 

lu  accumulating  stocks  preparatory  to  a  bull  campaign,  the  usual  pool 
method  Is  to  depress  prices  as  far  as  possible  with  a  view  of  catching  stop 
orders,  etc.,  then  to  quickly  buy  without  bidding  up  prices  until  the  market 
has  advanced  three  or  four  points,  then  work  It  down  again  as  far  as 
circumstances  will  permit.  After  some  weeks  of  feverlshness  and  nar- 
row fluctuations,  during  which  time  the  pools  are  quietly  gathering  in 
all  the  stock  possible  without  bidding  up  prices,  the  market  Is  allowed  to 
run  up  five  to  ten  points,  and  the  pools  take  profits  on  a  portion  of  their 
holdings,  as  a  kind  of  feeler.  Then  prices  are  worked  down  about  half  the 
advance,  and  their  sales  repurchased.  The  next  advance  may  carry  the 
market  up  ten  or  fifteen  points,  and  so  on.  There  may  be  a  dozen  pools  at 
work  all  this  time  in  different  stocks,  but  they  are  all  playing  the  game 
on   practically   the   same   lines. 

Before  the  upward  move  is  fairly  under  way,  and  sometimes  after  the 
move  starts,  sudden  breaks  will  be  made  in  a  stock  to  shake  out  "company" 
and  induce  short  selling;  for  if  outside  traders  can  be  made  to  think  the 
stock  is  a  sale  whenever  it  "puts  its  head  up,"  a  large  and  weak  short  in- 
terest can  be  fostered,  which  makes  upward  manipulation  easy.  A  common 
method,  not  only  by  the  pools,  but  by  many  professional  operators,  is  to 
divide  their  holdings  into  three  equal  lots;  holding  one  lot  perhaps  two  or 
three  years,  for  the  extreme  movement  of  say  80  points.  The  second  lot  is 
sold  at  the  culmination  of  each  minor  bull  campaign,  perhaps  In  three  or 
four  months,  at  a  profit  of  twenty  to  thirty  points,  and  bought  back  on  a  rea- 
sonable decline.  Profits  of  five  to  ten  points  are  taken  on  the  third  lot, 
which  is  also  bought  back  in  due  course.  This  method,  with  but  slight 
variations,  was  employed  by  the  Insiders  from  August,  1896,  to  March,  1899. 
Some  operators  divide  their  purchases  into  four  lots  instead  of  three,  using 
the  fourth   lot  entirely   for  scalping   purposes. 

When  the  larger  pools  are  preparing  for  a  bear  campaign,  they  usually 
begin  by  holding  the  market  strong,  and  If  possible  advance  two  or  three 
showy,  attractive  stocks  with  great  ostentation,  to  fool  the  public  with 
stories  of  "Vanderbilt  buying,"  "Standard  Oil  buying,"  etc.,  while  they  sell 
the  general  list  at  the  highest  possible  prices.  The  smaller  pools,  however, 
and  individual  professional  bears,  often  cover  with  as  little  loss  as  they 
can  if  their  short  selling  and  manipulation  fall  to  bring  about  a  decline; 
and  then  they  help  to  bid  up  stocks  a  few  points  to  where  they  can  again 
commence  selling,  and  so  on  until  finally  a  break  is  forced.  Whether  the 
pool  be  big  or  little,  when  at  last  the  market  commences  going  In  their 
favor,  they  hammer  it  on  the  wa.v  down,  and  as  the  decline  continues,  liqui- 
dation of  long  stocks  is  induced,  and  outside  short  sellers  invariably  come  in 
about  the  time  bottom  is  reached. 

Almost  every  important  play  which  the  pools  make  in  stocks  Is  in  anticipa- 
tion of  some  event.  Often  the  movement  culminates  just  after,  and  occa- 
sionally just  before,  the  happening  of  this  event.  When,  however,  there  is 
a  strong  element  of  uncertainty,  and  even  the  insiders  themselves  are  not 
sure  of  the  result,  then  the  movement  will  probably  continue  after  the 
anticipation   becomes   an   accomplished   fact. 


202  THE     ABC     OF     STOCK     SPECULATION. 

HINTS    ON     HOW     TO     WIN. 

"In  all  the  stupendous  works  of  nature  there  Is  nothing  more  sublime 
than  the  egotism  of  the  man  who  expects  to  win  when  he  plays  at  a  game 
of  skill  which  he  does  not  understand,  and  has  for  an  opponent  an  expert 
who  uses  marked  cards." 

But  a  study  of  the  following  facts  and  suggestions  should  enable  you  to 
play  this  game  with  at  least  a   chance  of   success. 

1st. — When  a  dull,  weak  market  has  become  active  and  declining,  then 
panicky,  and  enormous  quantities  of  stock  are  changing  bands,  prices  are 
most  likely  very  near  the  bottom,  and  a  rally  of  several  points  may  be  ex- 
pected. After  this  rally,  there  Is  usually  a  second  downward  movement  to 
about  the  previous  low  figures  touched  before;  but  this  is  not  invariable. 
Stocks  bought  at  such  times  should  be  held  for  good  advances,  provided 
other  signs  Indicate  that  It  is  the  end  and  not  the  beginning  of  a  bear 
campaign. 

2d. — If  after  a  dull,  sagging  market,  when  everybody  Is  bearish,  or  after 
a  decline,  there  comes  a  rally  of  3  or  4  points,  and  then  certain  stocks 
lose  i  to  J  of  this  rally,  after  which  they  rally  again,  and  this  time  lose 
only  about  half  of  the  latter  rally,  the  next  upward  move  of  about  a  point 
makes  it  certain  that  insiders  or  pwols  are  accumulating  those  stocks,  which 
will  Indicate  higher  prices.  The  same  movements  reversed,  when  market  is 
at   top^    Indicate   lower   prices. 

3d. — If,  after  a  pronounced  general  advance,  there  comes  a  day  of  large 
transactions,  excitement  and  enthusiasm,  the  advance  will  suddenly  stop 
and  the  market  react,  even  if  it  goes  higher  ultimately.  Then  will  ensue 
a  period  of  2  to  5  points  fluctuations,  that  is,  a  "traders'  market" — just  the 
thing   for  the    "scale"   and   "fluctuation"   systems. 

4th. — Keep  accurate  charts  and  records  of  the  most  active  stocks,  and  en- 
deavor through  them  to  learn  what  the  insiders  are  doing.  When  your 
charts  show  a  great  many  fluctuations  over  a  narrow  range  In  a  certain 
stock  after  a  decline,  and  finally  the  stock  advancing  beyond  this  range  on 
heavy  transactions,  it  will  bo  a  fair  assumption  that  the  Insiders  or  pools 
have  been  accumulating  that  security  and  Intend  advancing  the  price.  If 
your  records  show  that  several  leading  stocks  are  acting  In  a  similar  manner, 
It  Is  very  Eood  evidence  that  a  bull  murket  Is  ahead. 

5th. — After  the  market  has  been  dragging  along  a  low  level  for  some 
weeks,  with  only  small  fluctuations  in  prices,  then  a  day  or  two  of  extreme 
dullness,  it  is  safe  betting  that  a  bull  campaign  will  soon  be  under  way. 
When  the  bears  get  tired  of  selling  and  there  are  no  more  stocks  offered,  the 
market  of  course  comes  to  a  standstill,  and  the  Insiders  conclude  the  time 
has  arrived  to  advance  prices. 

6th. — When  everything  appears  to  favor  lower  levels  and  everybody  is 
bearish,  when  every  possible  reason  is  given  why  you  should  sell,  when  con- 
tinued bad  news  comes  in — and  yet  stocks  still  fluctuate  over  a  narrow  range, 
without  going  materially  lower  in  spite  of  short  selling  by  chronic  bears — 
you  may  be  sure  the  Insiders  are  accumulating,  and  the  next  pronounced 
move  sbonld  be   upward. 


THE     ABC     OF     STOCK     SPECULATION.  203 

7th. — The  volume  of  transactions  is  an  excellent  indicator  as  to  the  gen- 
eral trend  of  prices.  When  the  largest  volumes  are  on  the  advances  and 
trading  falls  o£E  on  the  reactions,  you  can  bo  pretty  sure  it  is  a  bull 
market. 

8th. — it  is  usually  dangerous  to  buy  stocks  on  the  third  day  of  an  advance. 
The  market  generally  moves  two  or  three  days  in  one  direction  and  then 
either  rests  or  reacts.  If  stocks  close  at  top  after  a  three  days'  advance 
and  open  strong  next  morning,  four  times  out  of  five  they  will  react  a  point 
at  least.  But  if  after  a  three  days'  rise  the  market  halts,  and  there  is  no 
decided  movement  either  way  for  a  couple  of  days,  the  reaction  is, not  likely 
to  occur.  The  advance  will  probably  be  resumed  on  the  third  day  of  this 
resting  period;     vice  versa  after  a  three  days'   decline. 

9th. — A  three  days'  rampant  advance  after  a  prolonged  bull  market, 
coupled  with  enormous  transactions,  great  excitement  and  enthusiasm — 
especially  on  the  culmination  of  expected  good  news — is  an  infallible  indica- 
tion that  the  campaign  is  over,   for  a  time  at  least. 

10th. — When  a  stock  advances  for  three  days,  and  on  the  third  day  of 
the  advance  the  total  transactions  lu  that  stock  foot  up  an  enormous  total, 
the  move  is  very  likely  over.  But  when,  after  a  period  of  dullness,  a 
stock  begins  to  advance  on  heavy  transactions,  buy  it  for  a  three  days' 
rise. 

11th. — There  are  only  two  ways  to  trade — either  take  small  losses,  or  else 
never  take  a  loss  at  all.  This  is  a  very  old  rule,  but  a  good  one.  If  a 
stock  goes  against  you,  limit  your  loss  at  from  half  a  point  to  2  points; 
especially  so  in  the  case  of  "tips."  Or  else  buy  on  scale  down,  first  taking 
very  good  care  to  find  out  that  the  shares  you  propose  buying  are  intrinsically 
worth  the  current  market  price.  Unless  you  deal  in  small  lots,  or  are  a 
capitalist,  the  limited  loss  plau  is  preferable.  Another  old  rule  and  a  good 
one,  is  to  buy  when  everybody  wants  to  sell,  and  sell  when  everybody  is 
clamoring  to  buy. 

A     FEW     DONT'S. 

DON'T  "go  short  for  a  turn"  in  a  I>ull  market,  or  "long"  In  a  bear 
market,  no  matter  how  certain  you  may  be  that  a  reaction  is  due.  It  is 
poor  policy  to  run  the  risk  of  losing  ten  points  to  scalp  one.  If  you  have 
good  profits  and  expect  a  reaction,  close  out  if  you  choose,  and  buy  back 
cheaper — but  DON'T  "go  short."  DON'T  shut  your  eyes  to  the  bear  ele- 
ments in  the  situation  because  you  are  long  of  stocks.  And  DON'T  be  a 
"chronic  bear,"  blind  to  all  signs  of  higher  prices.  DON'T  allow  your 
desires  and  hopes  to  obscure  your  judgment;  the  wish  should  not  be  father 
to  the  thought.  Keep  posted  on  all  the  elements  in  the  situation  and  how 
they  are  likely  to  influence  public  sentiment,  but  DON'T  forget  that  this 
is  of  less  importance  than  a  knowledge  of  how  the  insiders  are  working. 
DON'T  be  a  bull  when  the  public  have  the  stocks,  and  DON'T  be  a  bear 
when  the  floating   supply   of  securities   is  held   by   insiders. 

DON'T  attach  importance  to  the  weekly  "Bank  Statements"  or  to  London 
quotations;     they  are  often   "doctored,"   and  are  usually  misleading.     DON'T 


204  THE    ABC     OF     STOCK     SPECULATION. 

read  the  gossip  or  "news"  In  financial  papers,  brokers'  letters,  etc.  Insiders 
manipulate  the  press  as  they  do  values,  and  very  little  goes  Into  public 
print  that  they  want  to  keep  out.  Don't  live  over  the  ticker,  unless  you  are 
an  expert  at  tape  reading;  It  will  only  mislead  you;  nor  will  you  learn 
anything  from  the  old  "rounders"  and  "tapeworms"  who  study  it.  DON'T 
handle  stocks  not  easily  traded  In;  and  DON'T  try  to  get  the  last  fraction 
Vv'hen  you  already  have  good  profits.  DON'T  fight  the  course  of  the  market, 
rather  follow  it;  but  if  you  have  been  bearish  in  a  bull  campaign,  DON'T 
reverse  your  position  and  become  a  bull  when  the  advance  is  over;  If  you 
have  been  bullish  when  prices  were  falling,  DON'T  become  a  bear  when  the 
bull  campaign  Is  about  to  begin.  "Run  quickly  or  not  at  all."  DON'T  trade 
in  one  stock  exclusively,  as  something  might  happen;  divide  your  trades 
over  5  or  6  sound  stocks.  DON'T  over-trade,  or  carry  a  larger  number  of 
shares  than  your  capital  justifies.  And  DON'T  buy  on  bulges  nor  sell  on 
breaks. 

SYSTEMS. 

The  two  following  systems,  or  rather  methods,  are  as  good  as  any:  Use 
the  first  toward  the  end  of  either  a  bull  or  bear  campaign,  and  continue 
until  an  extended  movement  is  indicated;  then  switch  over  to  the 
second. 

Catching  the  Fluctuations. — During  a  "traders'  market,"  or  a  market 
without  any  pronounced  trend  one  way  or  the  other,  any  active  stock  will 
move  over  certain  points  dozens  of  times.  The  plan  is  to  place  a  not  that 
will  catch  these  daily  fluctuations.  Buy  100  shares  of,  say,  St.  Paul,  at  the 
market  price,  and  100  more  every  half  point  up  or  down,  but  don't  hold  more 
than  100  at  a  time  at  the  same  figure,  and  don't  accumulate  more  than  600 
shares  altogether.  Treat  every  purchase  as  a  separate  transaction,  and  when- 
ever a  profit  of  one  point  net  is  shown,  sell  that  100  shares,  buying  back 
on  a  one  point  reaction.  When  a  purchase  and  sale  are  both  indicated  at  the 
same  figure,  do  nothing — simply  hold  that  100  shares,  but  for  convenience 
assume  that  100  has  been  sold  and  100  bought.  If  St.  Paul  should  keep  on 
going  up  without  a  reaction,  you  would  thus  always  be  long  of  200  shares. 
Don't  get  frightened  because  of  a  temporary  downward  tendency.  The 
fluctuations  are  what  bring  you  profit.  Great  care  must,  of  course,  be  taken 
not  to  work  this  system  on  the  bull  side  if  the  general  trend  is  downward, 
or  on  the  bear  side  if  the  trend  is  upward. 

Limited  Pyramiding. — When  the  rules  and  indications  already  given  show 
that  a  pronounced  upward  movement  is  not  far  off,  buy  on  weak  spots  such 
quantities  as  your  means  justify.  Do  nothing  more  until  the  bull  campaign 
gets  under  way.  Then  buy  small  lots  with  your  profits  on  recessions  of 
half  a  point,  and  as  much  more  every  half  point  down.  Such  recessions  are 
continuous,  two  or  three  a  day,  even  in  the  strongest  bull  market.  Continue 
these  tactics  until  there  come  two  or  three  days  of  rapidly  advancing  prices, 
general  enthusiasm,  and  heavy  volume  of  transactions;  In  other  words, 
when  the  public  are  rushing  in  to  buy,  and  the  pools  are  feeding  out   some 


THE     ABC     OF     STOCK     SPECULATION,  205 

of  their  stock.  Then  sell  about  half  your  holdings;  wait  for  a  reaction 
of  at  least  a  point,  and  begin  buying  back  every  half  point  down.  When 
the  upward  movement  is  resumed  follow  same  plan  as  before,  until  the  signs 
and  principles  laid  down  in  preceding  pages  show  the  whole  bull  market 
as  about  to  culminate.  Then  sell  out  everything  on  the  "bulge."  Wait  for 
the  third  day  of  a  reaction  and  buy  moderately  for  the  "second  top." 
When  you  get  out  this  time,  either  take  a  rest,  or  return  to  the  "Fluctuation 
System,"   playing  it  on   the   short  side. 

FURTHER    REMARKS    ON    HOW   TO    PLAY   THE   GAME    SUCCESSFULLY. 

Though  the  same  general  tactics  are  pursued  year  after  year,  insiders 
constantly  scheme  out  new  tricks  to  deceive  their  opponents.  If  you  propose, 
therefore,  to  win  money  instead  of  losing  it,  you  must  not  only  master  the 
ordinary  complications  of  the  game,  hut  also  keep  up  to  date,  the  same 
as  in  any  other  business.  Good  judgment,  both  of  conditions  and  men,  is 
necessary.  If  you  keep  charts,  keep  them  properly,  and  learn  how  to  read 
them.  Do  you  think  a  farmer  who  had  never  seen  the  ocean  before,  could 
navigate  a  ship  by  means  of  charts?  I  believe  in  charts  only  when  other 
indications  point  the  same  way.  Watch  the  volumes  of  daily  transactions. 
Both  bull  and  bear  campaigns  culminate  in  large  volumes.  By  largo  volumes 
I  mean  largo  as  compared  with  the  preceding  daily  volumes.  Don't  mis- 
take for  this,  those  times  when,  after  a  long  period  of  dullness,  certain 
stocks  begin  to  advance  on  heavy  buying.  Time  and  seasons  are  to  be 
considered.  Four  months  is  the  usual  length  of  time  for  a  bull  campaign. 
As  a  rule,  there  is  also  a  minor  Inill  campaign  in  mid-winter.  The  position 
on  the  market  of  the  public  and  small  traders  is  of  great  importance.  No 
bull  campaign  ever  started  with  the  public  long  of  stocks,  and  no  bull  cam- 
paign ever  yet  ended  with  the  public  short.  Rates  at  which  stocks  are  car- 
ried on  the  E.icchanges  give  a  clue  to  the  publle's  position;  but  as  loaning 
rates  on  stocks  are  easily  manipulated  a  better  way  Is  to  find  out  from  bucket 
shops  or  broflerage  houses  which  side  their  customers  are  on.  If  outsiders 
are  all  selling,   it  is  pretty  safe  for  you  to  buy,   and  vice   versa. 

When  heavy  volumes  begin  to  come  out  the  old  trader  knows  there  Is 
"something  doing."  There  are  times  when  it  is  comparatively  easy  to 
discern  whether  activity  in  a  stock  will  be  followed  by  an  advance  or  a 
decline.  Don't  try  to  trade  every  day,  and  don't  chase  fractions.  Unless 
playing  some  good  scale  system,  take  a  quick  loss  if  a  purchase  or  sale 
goes  against  you,  and  start  over  again.  If  it  goes  in  your  favor,  try  to  get 
5  to  20  points,  according  to  what  the  stock  Is.  One  trade  closed  at  a  profit 
of  10  points  will  more  than  make  up  for  five  losing  trades  of  one  point 
each.  As  to  the  usual  scale  system  (that  Is,  buying  small  lots  every  point 
or  half  point  down,  and  taking  profits  of  one  point  net  on  any  separate  lot), 
it  is  all  right;  but  you  must  first  be  sure  that  the  stock  you  propose  buying 
Is  worth  approximately  its  current  market  price;  then  you  must  put  up 
such  big  margins  In  order  to  be  absolutely  safe,  that  your  percentage  of 
profit  on  the  Investment  will  usually  look  very  small. 


206  THE     ABC     OF     STOCK     SPECULATION, 

CHAPTEE  XXXV. 

Wall  Street  Points  of  View. 

A  collection  of  Wall  Street  aphorisms,  maxims,  truisms, 
proverbs,  opinions  and  points  of  view,  follows: 
Hear-say  is  half  lies. 
Talk  little  and  well. 
Control  your  temper. 
Enough  is  great  riches. 
No  one  is  always  right. 
The  first  loss  is  the  best. 
All  players  cannot  win. 
Press  luck  to  the  finish. 
There  is  luck  in  leisure. 
Cheap  advice  is  plentiful. 
A  true  word  needs  no  oath. 
Done  leisurely — done  well. 
Negotiate  before  slaughter. 
When  in  doubt  do  nothing. 
After  one  loss  comes  many. 
Wall    Street   easily  forgets. 
Great  vaunters,  little  doers. 
Learn  to  take  a  loss  quickly. 
Information  makes  a  market. 
Nothing  risked,  nothing  won. 
For  a  lost  thing  care  nothing. 
Losses  make  us  more  cautious. 


THE     ABC     OF     STOCK     SrECULATION.  207 

Little  and  often  fills  the  purse. 
All  is  not  lost  that  is  in  peril. 
When  wisdom  fails,  luck  helps. 
Punctual  pay  gets  willing  loan. 
Let  profits  run;  limit  all  losses. 
Some  men  learn  only  by  failing. 
Losers  are  always  in  the  wrong. 
Cut  a  loss  and  let  a  profit  run. 
A  thing  well  bought  is  half  sold. 
A  plunger  gets  but  seldom  holds. 
Interrogate  before  you  negotiate. 
Money  is  most  valued  when  lost. 
Everyone  is  wise  after  the  event. 
At  a  great  bargain  make  a  pause. 
Don't  buy  an  egg  until  it  is  laid. 
Under  fair  words  beware  of  fraud. 
Liberal  hands  make  many  friends. 
Novelty  always  appears  handsome. 
Business  neglected  is  business  lost. 
After  extreme  weakness  buy  stocks. 
More  sheep  than  lambs  are  sheared. 
Better  lose  the  wool  than  the  sheep. 
It  is  fortune,  not  wisdom  that  rules. 
Fraud  is  built  on  misrepresentation. 
Don't  put  all  your  eggs  in  one  basket. 
Better  lose  the  saddle  than  the  horse. 
The  market  will  be  here  to-morrow. 
Small  losses  often  prove  great  gains. 
Men  often  seem  rich  to  become  rich. 
Inspiration  often  means  perspiration. 


208  THE     ABC     OF     STOCK   SPECULATION. 

By  the  husk  you  may  guess  at  the  nut. 
Hear  the  other  side  and  believe  little. 
Beware  of  one  who  has  nothing  to  lose. 
Speculation  begins  when  certainty  ends. 
The  rich  buy  in  a  hurry  when  they  buy. 
In  a  traders'  market  buy  low — sell  high. 
Delay  overmuch  is  oftentimes  great  risk. 
An  old  man's  sayings  are  seldom  untrue. 
Get  an  investment  that  will  let  you  sleep. 
They  who  lose  to-day  may  win  to-morrow. 
Opportunity  is  often  lost  by  deliberating. 
Illusions  ruin  all  those  whom  they  blind. 
The  maxims  of  men  disclose  their  hearts. 
The  poorer  the  sheep,  the  harder  it  bleats. 
A  little  loss  frightens — a  great  one  tames. 
Where  something  is  found  there  look  again. 
He  that  will  have  eggs  must  have  cackling. 
The  best  is  always  the  cheapest  in  the  end. 
Liberality  is  not  giving  largely,  but  wisely. 
Get  information  before  you  invest,  not  after. 
Thrice  happy  they  who  have  an  occupation. 
Wisdom  adorns  riches,  and  shadows  poverty. 
No  lock  will  hold  against  the  power  of  gold. 
Begin  to  buy  when  prices  are  dull  and  weak. 
Satisfy  the  rich  and  they  will  pay  your  price. 
He  is  a  wise  man  who  wears  poverty  decently. 
Great  minds  have  purposes;  others  have  wishes. 
An  ounce  of  luck  is  worth  a  pound  of  wisdom. 
Great  undertakings  require  great  preparations. 
Of  what  use  is  a  10  per  cent,  margin  in  a  panic  ? 


THE     ABC     OF     STOCK     SPECULATION.  209 

The  rich  man  does  not  know  who  is  his  friend. 

A  man  gets  no  thanks  for  what  he  loses  at  play. 

They  who  live  in  a  worry  invite  death  in  a  hurry. 

Soft  words  and  hard  arguments  catch  the  investor. 

Put  your  eggs  in  one  basket  and  watch  the  basket. 

Every  time  the  sheep  bleats  it  loseth  a  mouthful. 

The  rich  are  meanest  when  they  buy  small  things. 

The  rich  man  is  apt  to  be  m.ore  generous  than  just. 

He  swears  who  is  accustomed  to  his  own  false  words. 

Money  easily  made,  easily  goes;  easy  come,  easy  go. 

If  you  do  not  hear  reason,  she  will  rap  your  knuckles. 

He  who  prates  of  his  wisdom  doth  but  conceal  an  ass.'' 

Provide  for  the  worst;  the  best  will  take  care  of  itself.^ 

It  is  an  old  maxim  that  accidents  usually  help  the  bears. 

Lend  money  without  bond  and  you  but  make  an  enemy. 

The  advice  of  successful  men  only  is  worth  application.' 

A  man  with  long  hair  is  generally  rash  and  impetuous. 

A  man  must  make  his  opportunity  as  often  as  he  finds 
it. 

Things  in  motion  sooner  catch  the  eye  than  what  not 
stirs. 

He  who  sells  what  isn't  his'n,  must  buy  it  back  or  go  to 
pris'n. 

Sell  and  borrow  only  those  stocks  which  have  a  wide 
market. 

Some  had  rather  guess  at  much  than  take  pains  to  learn 
a  little. 

Men  of  wit  and  facts  never  need  be  driven  to  indirect 
courses. 


210  THE     ABC     OF     STOCK     SPECULATION". 

To  estimate  a  man's  wealth,  divide  the  gossip  estimates 
by  four. 

To  grasp  an  opportunity  with  firm  decision  marks  an 
able  man. 

****  After  advancing  markets,  and  prices  waver,  lower  prices 
will  come. 

^  When  prices  are  high,  or  there  is  a  declining  tendency, 
sell  on  rallies. 

Much  money  made  before  twenty  is  apt  to  be  lost  in  the 
reign  of  plenty. 

He  is  rich  enough  who  has  no  debts,  and  young  enough 
who  has  health. 

"Early  information"  and  a  big  bank  account  will  be  the 
ruin  of  any  man. 

Moderate  riches  will  carry  you;  if  you  have  more,  you 
must  carry  them. 

The  success  of  a  manipulated  market  depends  largely  on 
sustained  activity. 

It  is  idle  to  wait  for  your  ship  to  come  in  unless  you 
have  sent  one  out. 

When  prices  close  weak  without  sujjport,  *a  rally  will  be 
in  order  next  morning. 

He  who  takes  no  care   of  little  things  will  not  have 
the  care  of  great  ones. 

-     When  prices  are  low,  or  there  is  an  advancing  tendency, 
buy  on  fair  concessions. 

A  lordly  taste  makes  a  beggar's  purse;  a  champagne  ap- 
tite  but  a  nurse  for  beer. 


THE    ABC     OF     STOCK     SPECULATION.  211 

A  wise  leader  watches  closely  the  current  of  events  and 
goes  with  it — not  against  it. 

Learn  which  side  of  the  market  he  is  on  and  you  quick- 
ly discover  the  cause  of  the  pain. 

When  prices  close  strong,  after  an  all-day  advance,  the 
next  move  is  generally  downward. 

Judgment  is  the  best  protector  of  energy;  information 
is  the  best  iirotector  for  resources. 

Those  who  lament  their  misfortunes  are  generally  they 
who  do  not  recognize  their  opportunities. 

He  who  loses  money  loses  much;  he  who  loses  a  friend 
loses  more,  but  he  who  loses  his  spirit  loses  all. 

If  the  trade  goes  in  your  favor,  follow  it  until  the  last 
trade  goes  against  you,  then  close  the  transaction. 

When  there  is  much  excitement  and  high  prices  for 
everything,  the  market  should  be  sold  for  a  good  turn. 

He  that  at  twenty  understands  nothing,  at  thirty  knows 
nothing,  at  forty  has  nothing,  will  lead  a  wretched  old  age. 

It  seems  to  be  a  law  of  panics  that  the  stocks  which 
have  the  largest  preceding  advances  have  also  the  largest 
declines. 

When  you  buy  and  the  trade  goes  in  your  favor,  follow 
it  up;  but  when  the  last  purchase  goes  against  you,  close 
the  transaction  and  take  your  profits  on  all  the  other 
trades. 

A  market  which  halts  after  a  rise,  which  becomes  irreg- 
ular and  which  develops  weak  spots,  is  more  apt  to  foster 
falling  than  rising  prices,  although  this  is  not  invariably 
the  case. 


212  THE     ABC     OF     STOCK     SPECULATION". 

In  active  markets,  an  advancing  or  declining  move- 
ment will  generally  run  three  or  four  days,  when  it  be- 
comes exhausted,  and  an  opportunity  is  ofEered  for  making 
a  profitable  turn  in  the  opposite  direction. 

"Believing  a  stock  had  reached  the  top  of  an  advance, 
I  sold  it  short  five  times  losing  each  time  before  I 
caught  the  swing.  My  losses  were  speedily  recovered  and 
I  closed  out  with  a  handsome  profit  on  the  deal." — A  Suc- 
cessful Trader. 

A  halt  in  a  bull  period  almost  always  starts  with  some- 
thing which  lessens  confidence  in.  credits.  When  credits 
begin  to  shrink,  business  begins  to  contract,  and  as  this 
throws  labor  out  of  employment,  the  great  circle  is  estab- 
lished and  generally  runs  until  self -correction  takes  place. 
"^  It  is  one  of  the  Street  theories  that  a  triple-top  fol- 
lowed by  relapse  is  evidence  of  coming  large  decline.  This, 
however,  is  not  sufficiently  certain  to  justify  action  except 
when  supported  by  substantial  reasons.  It  does  suggest, 
however,  that  the  forces  which  tend  to  check  advance  be- 
come strong  about  that  level. 

In  a  relapse,  after  a  large  advance,  there  are  usually  two 
stages;  first,  a  quick  decline,  due  to  bear  attacks  and  the 
execution  of  stop  orders,  and  second,  a  slow  fall  on  the 
preponderance  of  selling  over  buying  orders.  The  decline 
is  often  very  irregular,  full  of  rallies  and  making,  as  seen 
from  day  to  day,  a  feverish  trading  market. 

It  should  always  be  remembered  that  credit  falls  as 
rapidly  as  it  rises  and  that  it  is  possible  for  credit  resources 
to  be  swept  away  not  only  by  decreases  in  actual  values, 


THE     ABC     OF     STOCK     SPECULATION.  213 

but  by  any  loss  of  confidence  which  restricts  operations 
on  a  large  scale.  Credit  is  and  must  remain  the  basis  of 
business,  the  basis  of  speculation,  and  the  foundation  on 
which  values  rest. 

When  the  market  stops  going  up  and  momentum  is 
lost,  there  usually  grows  up  a  balance  of  selling,  which 
gradually  brings  declines.  At  such  time,  it  is  always 
wise  to  endeavor  to  sell  when  the  market  is  very  strong 
and  not  when  it  is  weak,  as  rallies  always  frighten  bears 
at  the  top  of  an  advance,  just  as  a  bull  is  always  weakest 
in  his  stomach  at  the  time  when  he  ought  to  have  most 
strength. 

All  systems  at  times  work  out  well.  Most  or  all  of 
them  break  down  in  practice  sooner  or  later,  partly,  how- 
ever, through  the  inability  or  unwillingness  of  traders  to 
follow  them  when  following  the  rule  becomes  expensive  or 
dangerous.  Many  systems  are  founded  upon  the  tendency 
in  the  market  toward  action  and  reaction,  and  they  are 
oftentimes  a  help,  but  should  always  be  put  in  a  secondary 
place,  the  preference  being  given  to  values. 

Buyers  of  stocks  belong  to  two  classes :  those  who  trade 
on  tendencies  and  who  take  hold  wherever  the  market  is 
active  without  much  reference  to  values  or  prices,  and 
those  who  always  try  to  buy  when  prices  are  off  instead 
of  when  they  are  up.  A  powerful  interest  undertaking  to 
handle  the  market  will  try  to  get  both  classes  of  buyers; 
hence  will  resist  the  market  at  times  to  encourage  one  set 
and  permit  reactions  at  another  to  encourage  others. 

All   stocks   will   move   more  or  less  with   the  general 


314  THE    ABC     OF     STOCK     SPECULATION. 

market,  but  value  will  tell  in  the  long  run.  The  policy  of 
buying  the  best  stocks  on  declines  is  almost  always  justified 
by  the  event.  The  policy  of  selling  the  worst  stocks  on 
advances  is  theoretically  wise,  but  is  sometimes  upset  in 
practice,  because  so  many  people  do  the  same  thing  as  to 
keep  the  stock  strong  by  the  covering  that  takes  place,  but 
in  this  case,  also,  value  will  finally  determine  the  price. 

Manipulation  of  stocks,  as  it  is  termed  in  Wall  Street, 
is  a  process  that  has  for  its  object  the  forcing  or  the  per- 
suading of  other  people  to  buy  or  sell  a  given  stock  or  bond. 
Where  force  is  used  once,  persuasion  is  probably  used 
twenty  times.  It  is  difficult  to  force  anyone  to  buy  some- 
thing at  a  given  price  unless  he  feels  that  he  must  have 
it.  It  is  often  a  relatively  easy  task  to  induce  people  to 
buy  something  by  making  them  think  that  they  want  it. 

Cycles  in  business  may  not  be  subject  to  scientific  demon- 
stration, but  the  theory  has  for  a  century  worked  well  in 
practice.  The  reasons  given  why  business  should  increase 
for  a  number  of  years,  and  then  for  a  number  of  years  run 
backwards  may  or  may  not  be  sound.  But  action  based  on 
belief  that  this  will  occur  has  been  sound.  When  the 
turn  comes,  there  is  always  something  to  help  the  move- 
ment along,  no  matter  whether  the  tendency  is  up  or 
down. 

A  lesson  taught  by  panics  is  that  in  times  of  great  fear 
and  anxiety  values  are  disregarded  and  the  best  stocks  go 
off  as  much  or  more  than  the  worst.  Indeed,  when  people 
have  to  have  money  they  sell  the  best  stocks  because  there 
is  some  market  for  them,  while  there  is  no  market  at  all 


THE     ABC     OF     STOCK     SPECULATION.  215 

for  others.  Furthermore,  the  best  stocks  are  likely  to  be 
in  loans  and  loans  are  sold  out  while  the  poorer  stocks, 
which  have  been  paid  for,  do  not  come  out  because  they  are 
not  forced  out. 

It  must  be  remembered  that  when  large  operators  have 
committed  themselves  on  one  side  or  the  other,  they  can- 
not change  their  position  quickly,  as  can  be  done  by 
smaller  traders.  They  are  oftentimes  obliged  to  stick  to 
a  position  for  awhile,  even  when  they  would  be  glad  to 
change.  It  is  equally  true  and  equally  important  to 
remember  that  large  operators  must  disregard  temporary 
conditions,  and  they  make  their  money  by  persistence  and 
by  overcoming  difficulties. 

There  is  no  way  of  telling  when  the  top  of  an  advance 
or  the  bottom  of  a  decline  has  been  reached  until  tome 
time  after  such  top  or  bottom  has  been  made.  Sometimes 
people  are  able  to  guess  when  prices  are  at  the  top  or  at 
the  bottom,  but  such  guessers  are  of  their  nature  of  no 
particular  value,  and  it  is  a  proverb  in  Wall  Street  that 
only  a  foolish  speculator  hopes  to  buy  stocks  at  the  lowest 
and  sell  them  at  the  highest.  The  speculator  with  exper- 
ience knows  that  no  one  can  do  this  with  certainty  or  regu- 
larity. 

"There  is  never  any  news  on  a  bull  market.  The  only 
time  when  news  in  its  fullest  sense  is  effective  is  when 
receiverships,  bankruptcies  and  disasters  generally  are 
pending.  Then  the  news  is  effective  in  forcing  breaks. 
Now  the  idea  prevails  as  always  that  no  news  is  good  news. 
There  are  times  when  the  market  is  helped  by  news,  as 


21G  THE     ABC     OF     STOCK     SPECULATION. 

in  a  time  of  panic,  when  some  statement  is  made  of  forth- 
coming steps  by  banking  interests  to  protect  the  market. 
Such  action  causes  a  rally  after  a  break  or  acts  as  a  check 
to  forced  legislation.^' — Peter  Bennett. 

Whenever  the  market  moves  out  of  a  narrow  rut,  stop 
orders  are  essential.  While  the  market  remains  within 
narrow  limits  stop  orders  are  a  needless  waste  of  money. 
There  is  no  way  of  telling  when  the  market  will  change 
from  narrow  swings  to  a  prolonged  move  except  by  a 
steady  watch  of  what  takes  place.  If,  as  a  result  of  days 
of  trading  there  is  increasing  weakness,  the  chances  are 
for  decline.  If  the  market  hardens  on  trading,  the 
chances  are  for  advance.  As  long  as  strength  and  weak- 
ness seem  to  about  balance  each  other,  the  chances  are  for 
short  turns. 

When  large  operators  enter  upon  a  stock  campaign, 
ihe  first  thing  they  do  is  to  provide  funds  on  a  scale  com- 
mensurate with  the  undertaking.  They  either  borrow  or 
arrange  to  borrow  great  sums  of  money.  This  monej^,  or 
its  credit  equivalent,  is  loaned  by  a  bank  to  an  individual, 
hut  when  deposited  by  the  individual  it  becomes  a  deposit 
of  the  bank.  This  is  why  loans  and  deposits  usually 
I  move  together.  What  the  banks  give  out  as  loans  they  take 
in  as  deposits.  Hence,  a  large  expansion  in  loans  and  de- 
posits means  that  some  interest  has  borrowed  a  great  deal 
of  money  and  is  either  using  it  on  account  of  some  past 
transactions,  or  is  holding  it  for  some  future  use. 

The  movement  of  the  market  is  always  in  swings.    The 
center  point  stands   for  close   approximation   to   values. 


THE     ABC     OF    STOCK    SPECULATION".  217 

Where  prices  go  clown,  the  momentum  carries  them  too 
far  and  when  they  go  up  the  same  thing  occurs;  hence  re- 
action in  both  is  inevitable.  The  same  thing  is  true  with 
regard  to  small  speculative  movements.  If  the  price  of  a 
stock  is  run  up  two  or  three  points,  it  very  generally 
swings  back  about  half  of  the  amount  of  the  advance. 
There  are  exceptions  where  changes  in  value  or  a  fixed 
speculative  purpose  makes  an  abnormal  movement,  but  in 
a  free-trading  stock  there  is  more  than  an  average  chance 
that  any  primary  movement  will  be  followed  by  a  reacting 
movement  of  at  least  three-eighths  of  the  first,  swing. 

Panics  in  the  stock  market  have  a  well  defined  course. 
The  record  since  1873  shows  only  two  exceptions  to  the 
rule,  the  rule  prevailing  in  all  other  cases.  A  panicky 
market  usually  lasts  during  parts  of  three  days,  although 
this  is  not  invariable.  The  lowest  prices  are  usually  made 
on  the  second  day.  From  those  prices  there  is  a  recovery 
amounting  usually  to  more  than  half  the  amount  of  the 
decline  from  the  level  of  prices  prevailing  before  the 
panic.  This  recovery  culminates  within  a  week  and  some- 
times not  for  thirty  days,  but  in  all  cases  prior  to  the 
May  9,  1901  panic,  within  thirty  days.  After  that  comes 
a  slow  decline  during  which  prices  lose  at  least  half  of 
their  recovery  and  in  case  of  a  bear  market  all  the  re- 
covery and  more  is  lost. 

Nothing  is  more  common  than  to  hear  people  say  that 
the  big  bankers  can  do  what  they  please  with  the  stock 
market,  and  yet  nothing  is  further  from  the  truth. 
The  stock  market  is  in  the  end  made  by  the  public  and  by 


218  THE     ABC     OF     STOCK     SPECULATION. 

no  one  else,  if  the  smaller  fluctuations  and  minor  "swings'* 
be  disregarded.  Traders  can  move  prices  within  narrow 
limits;  bankers  can  move  them  within  wider  limits,  but 
without  the  public  the  market  tends  constantly  to 
equilibrium.  Stocks  go  off  when  traders  sell  and  rally 
when  they  cover;  stocks  advance  when  bankers  bid  them 
up,  but  decline  unless  the  public  buys  on  the  advance. 
Both  traders  and  bankers  can  and  generally  do  anticipate 
the  public  in  its  operations,  but  if  the  public  does  not  do 
what  is  expected  of  it  nothing  is  gained  thereby. 

The  investor  determines  the  prices  of  stocks  in  the  long 
run.  This  statement  is  sometimes  disputed  by  those  who 
point  to  the  fluctuations  which  are  confessedly  made  by 
manipulators  without  regard  to  value.  It  is  true  that 
such  fluctuations  occur,  but  when  the  manipulation  is  over 
the  voice  of  the  investor  is  again  heard.  If  he  decides  that 
a  given  stock  is  worth  only  so  much,  the  manipulator  will 
ultimately  be  compelled  to  accept  that  valuation  because 
manipulation  cannot  be  kept  up.  The  object  of  manipula- 
tion is  to  buy  below  value  and  sell  above  value.  The  ex- 
perience of  all  traders  will  afford  many  illustrations  of 
how  stocks  have  recovered  after  artificial  depression  and 
relapsed  after  artificial  advances  to  the  middle  point  which 
represented  value  as  it  was  understood  by  those  who 
bought  or  held  as  investors. 

The  evident  uncovering  of  many  stop-loss  orders  on  a 
decline  moved  an  old  trader  to  belittle  their  use  for  specu- 
lative protection.  "When  a  man,"  said  he,  "gives  his 
broker  a  stop  order  he  thinks  that  only  he  and  his  broker 


THE     ABC     OF     STOCK     SPECULATION.  219 

know  it.  But  the  broker,  being  a  busy  man,  turns  the 
stop  over  to  some  two-dollar  specialist  in  that  particiilar 
stock.  In  the  course  of  a  week,  or  two  weeks,  the  prin- 
cipal specialists  in  any  active  stock  accumulate  a  large 
number  of  such  orders.  Then  the  manipulating  interests 
go  to  them  and  say:  'What  have  you  got  in  the  way  of 
stops  ?'  The  specialists  disclose  what  they  have,  and  if  the 
stops  are  abundant  enough  the  manipiilating  interests 
say:  'Shake  them  out.'  That's  why  it  so  often  happens 
that  a  stock  moves  just  far  enough  against  you  to  catch 
your  stop  and  then  moves  back  again." 

Daily  fluctuations  in  the  stock  market  are  influenced 
by  sentiment.  There  are  perhaps  400  men  who  trade  more 
or  less  on  the  floor  of  the  Exchange.  They  are  not  gen- 
erally the  class  of  operators  who  try  to  forecast  the  some- 
what distant  future,  but  their  object  in  their  daily  trading 
is  to  act  promptly  on  such  news  and  developments  as  come 
to  them  hour  by  hour.  Practice  in  this  has  made  the 
professional  traders  extremely  skillful  in  detecting  signs 
of  changes  in  the  market  and  in  reading  anything  that  is 
likely  to  affect  trading.  The  result  is  that  the  attention  of 
these  operators  is  apt  to  be  fixed  on  one  or  two  prominent 
facts  and  the  trading  of  all  hinges  more  or  less  on  develop- 
ments at  those  points.  If  the  market  is  declining  and  it 
begins  to  rally  on  some  special  news  or  special  buying, 
traders  all  want  to  buy  at  the  same  time,  causing  the  speed 
of  the  recovery.  Or,  if  news  is  unfavorable,  the  room  wants 
to  sell  all  at  the  same  time,  causing  the  rapidity  and  the 
extent  of  decline. 


220  THE     ABC     OF     STOCK     SPECULATION. 

Value  has  little  to  do  with  temporary  fluctuations  in 
stock  prices,  but  is  the  determining  factor  in  the  long  run. 
Values,  when  applied  to  stocks,  are  determined,  in  the 
end,  by  the  return  to  the  investor,  and  nothing  is  more 
certain  than  that  the  investor  establishes  the  price  of 
stocks.  The  manipulator  is  all-powerful  for  a  time.  He 
can  mark  prices  up  or  down.  He  can  mislead  investors, 
inducing  them  to  buy  when  he  wishes  to  sell,  and  to  sell, 
when  he  wishes  to  buy;  but  manipulation  in  a  stock  can- 
not be  permanent,  and  in  the  end  the  investor  learns  the 
approximate  truth.  His  decision  to  keep  his  stock  or  to 
sell  it  then  makes  a  price  independent  of  speculation  and, 
in  a  large  sense,  indicative  of  true  value.  It  is  so  indica- 
tive because  the  price  made  is  well  known  to  insiders,  who 
also  know  better  than  anyone  else  the  true  value  of  the 
stock.  If  the  price  is  too  low,  insiders  will  buy;  hence 
.stability  in  the  price  of  a  stock  means  that  insiders  do  not 
think  the  stock  especially  cheap  or  dear. 

Early  information  affecting  stock  market  fluctuations 
is  dangerous  to  trifle  with  and  the  story  of  the  "Minister 
and  the  Stock  Exchange,"  as  told  in  the  following  letter 
to  the  London  Spectator,  illustrates  the  point: 

sir:  Permit  me  to  Impart  to  you  the  substance  of  a  family  legend.  My 
grandfather  was  a  city  man,  a  Member  of  Parliament,  and  an  adherent  of 
the  Grenville  party.  On  matters  connected  with  "the  city"  the  politician 
was  in  the  habit  of  consuUing  the  city  man  in  question.  On  one  occasion 
when  the  subject  of  conversation  was  the  possibility  of  realizing  large  profits 
from  early  information.  Lord  Grenville  asked  my  grandfather  whether  he 
thought  all  the  stories  told  of  these  large  profits  were  founded  on  fact.  My 
grandfather  answered  that  he  was  not  a  stockjobber,  still  less  a  political 
authority,  but  that  he  could  easily  test  the  matter  if  Lord  Grenville  wished 
it.  His  Lordship  then  said:  "I  will  give  you  the  earliest  information  ob- 
tainable In  the  position  I  hold  as  Prime  Minister,  and  you  shall  try  your 
fortune  and  mine  in  dealing  on  the  Stock  Exchange." 


THE     ABC     OF     STOCK     SPECULATION.  221 

At  the  end  of  a  year  the  statesman  and  merchant  met  again  to  study  the 
account  after  the  earliest  information  given  by  the  Prime  Minister  to  the 
city  man  had  been  acted  on.  My  grandfather  rendered  the  account,  and 
showed  that,  had  the  information  led  to  transactions  on  a  large  scale,  all 
parties  connected   with   thefti   would   have   been   utterly   ruined. 

When  the  battle  of  Waterloo  was  fought  it  was  *not  the  Government  which 
told  the  news  to  Rothschild,  but  Rothschild  who  told  it  to  the  Government. 

In  my  own  experience  I  have  known  the  man  with  the  most  brilliant  pros- 
pects granted  to  any  one  utterly  disgraced  and  ruined  by  attempting  to 
deal  in  the  manner  suggested.  His  own  description  of  what  occurred  will 
suffice.  He  had  not  a  minute's  peace  all  the  morning  till  the  evening  paper 
came  in  with  the  news  obtained  by  its  editor,  not  by  the  speculator's 
exclusive   information.  H.  R.  G. 

If  the  public  would  realize  one  thing,  and  realize  it  so 
that  it  never  forgot  it,  its  chances  in  Wall  Street  would 
be  materially  improved.  From  the  Wall  Street  point  of 
view — meaning  thereby  the  sentiment  prevailing  as  a, 
whole,  and  on  an  average  on  the  part  of  the  speculative 
and  financial  community — the  public  has  money  which 
Wall  Street  desires  that  it  shall  exchange  for  securities. 
It  is  triie  that  so  far  as  a  large  section  of  the  Street  is 
concerned  there  is  not  the  slightest  desire  to  knowingly 
sell  worthless  securities  to  the  public.  The  essence,  how- 
ever, of  the  matter  is  that  Wall  Street  is  always  in  the 
position  of  selling  securities  to  the  public  for  money, 
sometimes  being  able  to  sell  easily  and  in  quantity,  and  at 
other  times  not  being  able  to  sell  much,  and  that  only  with 
difficulty.  The  public  should  remember  that  all  the 
manipulation  of  Wall  Street  has  but  one  end,  namel}^,  to 
exchange  securities  for  money.  For  in  the  long  run  the 
public  does  not  sell  securities.  What  it  buys  and  pays  for 
it  generally  keeps.  Once  stocks  have  been  sold  to  the  pub- 
lic they  seldom  or  never  return  in  any  quantity  to  the 
Street. 


222  THE     ABC     OF     STOCK     SPECULATION". 

Jay  Gould  said  once  that  the  first  requisite  for  suc- 
cessful speculation  was  patience.  Most  operators  realize 
that  they  have  cut  short  their  profits,  frequently  and 
needlessly,  by  the  lack  of  patience.  A  great  movement  in 
the  market  does  not  usually  come  suddenly.  The  market, 
while  manipulated  in  a  narrow  sense,  is  in  its  large  sense 
created  by  conditions.  The  prices  of  stocks  act  as  a  sort 
of  skirmish  line,  out  in  front  of  the  developments  that 
have  actually  occurred,  and  in  the  direction  of  those  which 
are  expected  to  occur.  When  they  get  too  far  out,  they  have 
to  fall  back.  Then,  when  the  facts  become  clear,  they 
move  for  a  time  with  a  rush.  When  the  tide  is  nearly  in 
or  nearly  out,  there  is  a  period  of  slack  water.  When  the 
business  tide  is  nearly  in  or  nearly  out,  there  is  a  period 
when  it  is  impossible  to  say  definitely  that  conditions  have 
changed  in  a  large  way  either  for  better  or  for  worse. 
Some  conditions  may  have  changed  and  others  not,  with 
the  balance  doubtful.  This  makes  a  corresponding  situa- 
tion in  the  stock  market.  Prices  go  off  on  that  which  is 
unfavorable  and  recover  again  on  that  which  is  favorable. 
The  net  change  during  such  a  time  may  be  small  even  if 
the  market  is  fairly  active  and  the  gross  changes  are  quite 
large. 

"Addison  Cammack,  a  great  bear  trader  in  his  day,  be- 
lieved in  Napoleon's  famous  dictum:  'The  Lord  is  on 
the  side  of  the  heaviest  battalions.'  That  is,  he  would 
start  to  sell  the  market;  if  it  yielded,  he  would  follow 
up  the  advantage  with  an  avalanche  of  selling  orders; 
he  overwhelmed  his  opponents.     The  simple  question  was. 


THE     ABC     OP     STOCK     SPECULATION.  223 

could  he  sell  more  stock  than  the  other  side  was  able  to 
or  willing  to  buy.  If  the  heavier  battalion  happened  to  be 
on  the  other  side  and  the  market  continued  to  advance  he 
quickly  beat  a  retreat  so  as  to  be  able  to  fight  another  day. 
And  this  is  the  difference  between  the  big,  wise  bear  and  the 
foolish  little  bear.  The  big  bear  knows  that  some  time 
conditions  will  be  ripe  to  hammer  the  market.  He  tries 
it  occasionally.  Frequently  he  makes  a  mistake,  but  he 
withdraws  from  the  field  with  his  resources  practically  in- 
tact. His  opportunity  surely  comes,  and  then  there  is 
dismay  among  the  bulls.  The  cub  specimen,  however,  does 
not  know  enough  to  run  away  from  danger.  He  continues 
to  fight  when  there  is  no  fighting  chance.  That  is  why 
Addison  Cammack  retired  from  the  field  with  the  reputa- 
tion of  having  been  a  very  big  and  dangerous  bear,  while 
so  many  cubs  with  bear  instincts  never  grew  up  into  fear- 
some objects." — Schuyler  West. 

Question — In  answer  to  an  inquiry,  you  say  $1,000  is 
the  proper  margin  for  trading  in  10  shares.  In  most  stocks 
listed  $1,000  would  more  than  pay  outright  for  10  shares. 
In  many  stocks  listed  $1,000  would  pay  outright  for  20 
shares.  Will  you,  therefore,  be  good  enough  to  explain 
your  meaning?  Should  not  the  size  of  the  margin  be 
governed  by  the  nature  of  the  security  bought,  and  by  the 
purchase  value,  rather  than  by  any  arbitrary  rule  ? — Z. 

Answer — There  is  a  general  impression  that  $1,000  is  a 
fair  margin  for  100  shares  of  stock.  Perhaps  no  one  idea 
in  speculation  has  cost  traders  more  money.  If  a  man  buys 
100  shares,  with  10  per  cent,  margin,  he  is  in  no  position 


224  THE    ABC     OF     STOCK     SPECULATION. 

to  average  his  account,  and  model-ate  losses  absorb  his  capi- 
tal so  rapidly  as  to  leave  him  little  option  except  to  lose 
money.  The  man  who  looked  upon  $1,000  as  the  proper 
margin  for  dealing  in  10  shares  would,  as  you  say,  buy 
outright  in  some  cases.  But,  supposing  his  first  purchase 
to  have  been  made  on  an  estimate  of  value,  he  would  be 
able  to  buy  a  second  lot,  and  even  a  third  lot,  if  it  should 
become  necessary  and  his  opinion  of  value  was  unchanged. 
The  ability  to  stay  and  to  average  wisely  would  mean  a 
profit  in  the  end.  The  great  curse  of  speculation  is  over- 
trading. If  operators  would  work  on  a  basis  illustrated  by 
the  relation  of  $1,000  to  10  shares,  they  would  be  very 
much  surer  of  making  money  than  they  are  now.  The 
amount  of  margin  is  not  to  be  considered  with  reference 
to  the  initial  purchase,  but  as  bearing  upon  the  ability  of 
the  trader  to  stay  in  the  market  and  to  turn  and  take  ad- 
vantage of  such  opportunities  as  may  occur.  This  cannot 
be  done  without  a  large  factor  of  safety. 

"There  is  always  a  disposition  in  people's  minds  to  think 
that  existing  conditions  will  be  permanent.  When  the 
market  is  down  and  dull,  it  is  hard  to  make  people  be- 
lieve that  this  is  the  prelude  to  a  period  of  activity  and 
advance.  When  prices  are  up  and  the  country  is  prosper- 
ous, it  is  always  said  that  while  preceding  booms  have 
not  lasted,  there  are  circumstances  connected  with  this  one 
which  make  it  unlike  its  predecessors  and  give  assurance 
of  permanency.  The  one  fact  pertaining  to  all  conditions 
is  that  they  will  change.  This  change  follows  modifica- 
tions of  the  law  of  supply  and  demand.     The  cycle  of 


THE     ABC     OF     STOCK    SPECULATION.  235 

trade  is  well  known.  Beginning  with  a  period  of  depres- 
sion, the  small  dealer  finds  himself  unable  to  buy  the 
amount  of  goods  required  for  hand-to-mouth  trading  quite 
as  cheaply  as  when  the  previous  purchase  was  made.  He, 
therefore,  buys  a  little  more.  The  aggregate  of  this  buy- 
ing increases  the  business  of  the  jobber  and  this  swells 
the  output  of  the  manufacturer,  who  is  enabled  to  employ 
more  labor,  resulting  in  larger  purchases  by  labor  of  manu- 
factured goods  and  agricultural  products,  which  brings 
the  circle  round  to  the  producer.  At  each  step  in  the 
proceedings,  rising  prices  bring  increased  purchases  and  in- 
creased confidence,  until  the  retailer  buys  without  hesita- 
tion many  times  the  amount  of  goods  which  he  would  have 
dared  to  take  at  the  beginning  of  the  cycle  of  improving 
trade.  This  multiplied  by  millions  makes  the  demand 
which  at  times  seems  inexhaustible,  which  supplies  the 
railroads  with  tonnage,  and  which  in  its  ramifications 
creates  the  investment  fund  which  finally  seeks  employment 
in  Wall  Street.  The  declining  period  is  accompanied  by 
steady  reversal  of  these  varied  transactions.  When  the 
retailer  and  the  jobber  find  that  goods  cost  less  than  before 
they  shrink  purchases.  When  purchases  in  advance  of 
requirements  bring  loss  and  not  profit,  they  bring  also  loss 
of  confidence  and  curtailment  of  demand.  As  the  process 
of  shrinkage  goes  on,  it  touches  all  points  of  trade.  It  is 
a  kind  of  flame  which  creates  the  fuel  which  is  burned. 
Experience  has  shown  that  it  takes  about  five  years  for 
one  of  these  cycles  to  complete  itself.  It  takes  approxi- 
mately five  years  for  the  country  bare  of  stocks  to  become 
the  country  filled  with  stocks,  and  it  takes  about  five  years 


226  THE     ABC     OF     STOCK     SPECULATION. 

more  for  the  over-stocked  markets  of  the  country  or  of  the 
world  to  become  practically  bare.  As  the  stock  market 
is  always  an  effect  and  never  a  cause,  it  must  respond  to 
these  conditions.  As,  however,  the  stock  market,  while  an 
effect,  is  also  a  discounted  effect,  the  decline  in  prices  of 
stocks  usually  anticipates  decline  in  commodities,  because 
operators  for  a  fall  sell  in  anticipation  of  the  changes 
which  they  foresee  in  business  conditions." — Dow. 

"It  is  true  in  finance  as  it  is  in  philosophy  or  in  any  sub- 
ject of  mortal  thought,  that  the  general  tendency  of  weak 
human  nature  is  to  believe  what  one  wants  to  believe  rather 
than  what  is  so.  The  judgments  formed  by  the  great  mass 
of  people  are  apt  to  be  those  of  idiosyncrasy,  passion  or 
temperament,  rather  than  of  calm  and  poised  reflection. 
Few  men  are  so  constituted  that  they  can  look  facts  and 
facts  alone  in  the  face  and  form  conclusions  uncolored 
by  native  optimism  or  pessimism.  A  corollary  proposition 
is  that  few  people,  as  a  rule,  take  pains  in  their  investiga- 
tion of  financial  matters  or  go  cautiously  from  general 
belief  to  a  specific  position.  In  buying  or  selling  securi- 
ties it  is  the  vague  and  glittering  that  is  apt  to  determine 
their  action  rather  than  the  detailed  and  the  substantial. 
And  there  is  no  part  of  human  activity,  looked  at  from 
the  mere  worldly  point  of  view,  in  which  just  these  quali- 
ties of  accurate  and  balanced  thinking  are  so  necessary 
as  in  the  financial  world.  If  a  man  has  a  bond  docs  he 
know  exactly  what  is  its  lien?  If  he  is  interested  in  a 
company  as  a  stockholder,  does  he  look  carefully  into  the 
company's  annual  report  and  make  up  his  mind  accurately 


THE     ABC     OF     STOCK     SPECULATION.  227 

as  to  the  wisdom  of  the  dividends  paid  and  the  true 
significance  of  the  various  amounts  charged  for  operating 
expenses  and  depreciation  ?  An  incident  which  may  fairly 
be  called  a  part  of  recent  financial  history,  and  which 
should  be  adverted  to  because  of  the  lesson  it  carries  of  this 
need  of  rigorous  scrutiny  in  financial  matters,  is  the  story 
told  of  those  bondholders  of  the  Chicago,  Milwaukee  and 
St.  Paul  Kailway  who  allowed  a  valuable  privilege  to  lapse 
because  of  their  ignorance  concerning  the  meaning  of  the 
obligation  possessed  by  them.  Too  late  they  discovered 
that  they  must  receive  payments  upon  their  bonds  at  par, 
when  a  few  weeks  before  they  could  have  converted  the 
bonds  into  preferred  stock  worth  nearly  double  the  sum 
received.  Nothing  could  be  plainer  than  the  declaration 
contained  in  the  bond  that  the  privilege  of  conversion  it 
offered  should  be  exercised  only  at  a  certain  time  and  in 
a  certain  way.  Yet  many  of  the  bondholders  were  wholly 
in  appreciative  of  it.  Nor  is  carelessness  in  such  matters 
confined  to  people  who  are  untrained  in  finance.  It  is 
trustworthily  stated  thai  a  great  man  in  one  of  the 
banking  houses  having  much  to  do  with  the  great  North- 
ern Pacific  fight  for  control,  admitted  that  not  until  he 
had  so  far  engaged  in  the  battle  for  the  possession  of  the 
Northern  Pacific  shares  that  he  could  not  retreat  from  it, 
had  he  read  the  certificate  of  the  preferred  stock,  upon 
whose  disputed  construction  the  question  of  defeat  or  vic- 
tory in  the  struggle  depended.  A  very  much  surprised 
man  he  was  when  he  found  that  there  were  clauses  in  the 
certificate  of  which  he  was  not  aware." — Daniel  Kellogg 
(Philip  T^^ing). 


228  THE     ABC     OF     STOCK     SPECULATION. 

A  correspondent  writes:  I  have  several  points'  profit 
in  Atchison  and  in  Missouri  Pacific.  I  cannot  see  the 
market  more  than  once  a  day  and  I  am  afraid  that  my 
profit  will  run  away  before  I  know  it.  At  the  same  time 
I  hope  for  more  profit  by  holding  on.    What  can  I  do  ? 

The  thing  to  do  in  this  case  is  to  put  a  stop  order  in 
your  stock  and  keep  it  about  two  points  below  the  highest 
price.  Missouri  Pacific  has  sold  at  117^.  Tell  your 
broker  to  sell  if  Missouri  Pacific  falls  back  to  115^.  If 
Missouri  Pacific  goes  to  118^  raise  your  stop  order  to 
116}4.  Keep  this  up  until  the  stop  order  is  executed  or 
until  you  are  satisfied  to  take  the  profit  which  you  have. 
For  an  out-of-town  operator,  no  method  of  trading,  once 
a  profit  has  been  established,  is  any  more  satisfactory  than 
this.  When  a  bull  campaign  is  fairly  under  way  in  a 
stock,  the  price  frequently  advances  a  greater  part  of  the 
movement  without  a  reaction  of  two  points.  Some  opera- 
tors think  2y2  points  a  little  safer,  as  sometimes  a  two 
point  stop  is  just  sufficient  to  spoil  a  handsome  profit.  In 
a  large  percentage  of  cases,  however,  if  a  stock  drops  back 
two  points  it  will  drop  more  than  two  points.  An  operator 
running  a  bull  campaign  likes  to  see  reactions  of  about  a 
point,  because  they  enable  him  to  test  the  market  fre- 
quently and  to  see  if  the  public  is  following  his  manipula- 
tion. But  he  does  not  like  to  see  reactions  go  much 
further,  because  they  would  have  a  tendency  to  chill  the 
bull  enthusiasm  which  he  wishes  to  create.  Success,  from 
his  standpoint,  means  a  growing  public  interest  which 
will  gradually  absorb  the  stock  which  he  has  to  sell.  This 
interest  can  be  kept  up  only  by  a  comparatively  large 


THE     ABC     OF     STOCK     SPECULATION.  229 

market,  a  well  sustained  tone  and  a  gradual  rise.  Hence, 
the  reason  for  putting  a  stop  about  two  points  from  the 
highest.  The  manipulating  interest,  as  long  as  the  cam- 
paign lasts,  will  be  certain  to  have  a  good  volume  of  buying 
orders  in  a  stock  after  it  has  had  about  one  point  decline 
unless  there  is  some  special  reason  for  a  change  of  tactics. 
Ordinarily  a  stock  which  has  had  a  10  point  rise  is  kept 
for  some  time  around  the  upper  level  of  prices.  It  takes  a 
little  time  to  accumulate  stock  and  a  little  time  to  market 
it,  and  during  the  marketing  process,  the  price  has  to  be 
kept  strong  and  given  the  appearance  of  going  higher.  An 
operator  who  wishes  to  sell  10,000  shares  of  stock  at  an 
advance  would  usually  have  to  be  a  large  buyer  at  the 
higher  prices  in  order  to  be  able  to  sell.  His  hope  would 
be  that  for  every  thousand  shares  of  stock  bought  he 
would  be  able  to  sell  twelve  or  fourteen  hundred,  and  that 
this  process  would  gradually  exhaust  his  line.  The  follower 
in  a  campaign  has  the  advantage  that  he  can  sometimes 
see  evidences  of  this  realizing  and  obtain  therefrom  a  hint 
as  to  when  it  is  best  for  him  to  sell.  If  not,  the  stop  order 
is  apt  to  prove  his  best  friend.  He  loses  two  points  that 
he  might  have  made,  but  by  waiting  for  the  stop  order  to 
be  executed  he  often  makes  more  than  two  points  which 
he  would  not  have  obtained  had  he  relied  upon  his  judg- 
ment as  to  the  best  time  to  sell. 

It  is  an  article  of  faith  with  many  operators  that  dull- 
ness is  always  followed  by  decline.  The  basis  for  this 
belief  is  that  during  certain  periods  this  occurs,  and  the 
repetitions  are  regarded  as  establishing  a  rule.     The  fact 


230  THE     ABC     OF     STOCK     SPECULATION. 

is,  however,  that  the  action  of  the  market  after  dullness 
depends  chiefly  upon  whether  a  bull  market  or  a  bear 
market  is  in  progress.  In  a  bull  market,  dullness  is  gen- 
erally followed  by  advances;  in  a  bear  market,  by  de- 
cline. As  bear  markets  as  a  rule  last  longer  than  bull 
markets,  dullness  is  followed  by  decline  rather  oftener 
than  by  advance.  There  are  exceptions,  but  they  do  not 
alter  the  general  rule.  The  reason  why  in  a  bull  market, 
dullness  is  followed  by  advance,  is  that  a  bull  market  is  the 
exponent  of  increasing  values.  Values  go  on  increasing, 
while  the  market  rests,  and  prices  start  up  because  it  be- 
comes apparent  to  cliques  or  individuals  that  values  are 
above  prices,  and  that  there  is  margin  for  rise.  Exactly 
the  reverse  argument  applies  to  declines  after  dullness  in 
a  bear  period.  Prices  fall  because  values  are  falling,  and 
dullness  merely  allows  the  fall  in  values  to  get  ahead  of 
the  fall  in  prices.  The  start  after  a  period  of  inactivity  is 
generally  due  either  to  some  special  event  or  to  manipula- 
tion. In  the  former  case,  the  reason  for  acting  is  obvious. 
In  the  latter  case,  manipulators  begin  by  studying  the 
situation  and  reach  a  conclusion  that  it  will  pay  them  to 
move  prices.  They  then  scrutinize  the  speculative  situa- 
tion, and  learn  something  of  the  position  of  traders; 
whether  they  are  carrying  a  good  many  stocks  or  not; 
whether  they  seem  disposed  to  deal;  whether  margins  ap- 
pear to  be  large  or  small;  and  whether  specialists  have 
large  scale  orders  to  either  buy  or  sell.  This  gives  a  basis 
on  which  manipulation  begins.  The  public  often  fol- 
lows the  lead  given,  sometimes  to  its  own  advantage  and 
sometimes  to  the  advantage   of  the  manipulators.     All 


THE     ABC     OF     STOCK     SPECULATION.  231 

this,  however,  is  merely  an  incident  in  the  main  tendency 
of  prices,  which,  as  a  whole,  is  in  accord  with  the  values 
which  grow  out  of  changes  in  earnings.  Temporary  move- 
ments in  the  market  should  always  be  considered  with  ref- 
erence to  their  bearing  on  the  main  movement.  The  great 
mistake  made  by  the  public  is  paying  attention  to  prices 
instead  of  to  values.  Whoever  knows  that  the  value  of  a  par- 
ticular stock  is  rising  under  conditions  which  promise 
stability,  and  the  absence  of  developments  calculated  to 
neutralize  the  effect  of  increasing  earnings,  should  buy  that 
stock  whenever  it  declines  in  sympathy  with  other  stocks, 
and  hold  it  until  the  price  is  considered  high  enough  for 
the  value  as  it  is  believed  to  exist.  This  implies  study 
and  knowledge  of  the  stock  chosen,  but  this  marks  the  dif- 
ference between  intelligent  trading  and  mere  gambling. 
Anybody  can  guess  whether  a  stock  will  go  up  or  down, 
but  it  is  only  guessing  and  the  cost  of  guessing  will  eat 
up  most  of  the  net  profits  of  trading  on  pure  guesses. 
Intelligent  trading  begins  with  study  of  conditions,  and 
a  justified  opinion  that  the  general  situation  is  either 
growing  better  or  worse.  If  general  conditions  are  im- 
proving, ascertain  if  the  particular  stock  to  be  dealt  in  is 
having  a  fair  share  of  that  general  improvement.  Is  its 
value  rising?  If  so,  determine  whether  the  price  of  the 
stock  is  low  or  high  with  reference  to  that  value.  If  it  is 
low,  buy  the  stock  and  wait.  Do  not  be  discouraged  if  it 
does  not  move.  The  more  value  goes  on  increasing,  the 
greater  the  certainty  that  rise  in  the  stock  will  come. 
When  it  does  come,  do  not  take  two  or  three  points  profit 
and  then  wait  for  a  reaction,  but  consider  whether  the 


232  THE     ABC     OF     STOCK     SPECULATION". 

stock  is  still  cheap  at  the  advance,  and  if  so,  buy  more, 
rather  than  sell  under  the  assumption  that  the  expected 
rise  is  underway.  Keep  the  stock  until  the  price  appears 
to  be  up  to  the  value  and  get  a  substantial  profit.  This  is 
the  way  the  large  operators  make  their  money;  not  by 
trading  back  and  forth,  but  by  accurate  forecasts  of  com- 
ing changes  in  value,  and  then  buying  stocks  in  quantity 
and  putting  the  price  up  to  value.  The  small  operator 
cannot  put  prices  up,  but  if  his  premises  are  sound,  he 
can  hold  stock  with  assurance  that  large  operators  and  in- 
vestors will  put  the  price  up  for  him. 


Nelson's 

Wall    Street 

Library 


Vol.   I.      The   A    B    C  of    Wall  Street 

By  S.  A.  Nelson.  164  pages,  illustrated.  Com- 
pletely and  accurately  descriptive  of  the  money  and 
speculative  markets,  and  also  containing  a  dictionary 
of  Wall  Street  words,  names  and  phrases. 

Vol.    II.     The   Anatomy   of   a   Railroad 
Report    and     Ton    Mile     Cost 

By  Thomas  F.  Woodlock.  116  pages.  An  analysis  of 
railroad  reports — written  by  an  authority  on  the  sub- 
ject— for  investors,  stockholders  and  students,  together 
with  a  study  in  railroad  economics  of  value  to  anyone 
interested  in  American  railroad  finance  and  management. 

Vol.  III.     The  Theory  of  Stock  Exchange 
Speculation 

By  Arthur  Crump.  125  pages.  A  volume  that  should 
be  studied  by  every  trader  in  stocks. 

Other  volumes  in  preparation. 

The  series  is  bound  in  cloth  and  leather  and  can  be 
ordered  through  booksellers  and  newsdealers  generally, 
or  will  be  mailed  postpaid  for  $1.00  each. 


S.  A.   Nelson, 
16-18  Park  Place 


Publisher 

New  York  City 


Vol.  IV. 


The  A  B  C 


of 


Banks  and  Banking 

By  Mr.  Geo.  M.  Coffin 

Ex-Deputy  Comptroller  of  the  Currency 


THE  object  of  this  book  is  to  give  a  simple  and  concise 
explanation  of  the  principles  and  practice  of  bank- 
ing in  the  United  States,  and  it  is  successfully  accom- 
plished. It  is  designed  to  appeal  to  the  outsider  as  well  as 
the  man  in  the  bank.  While  by  no  means  the  last,  or  every 
word  about  banking,  it  can  be  accepted  as  an  authoritative 
primer,  covering  a  field  that  has  hitherto  been  somewhat 
neglected.  In  view  of  the  growth  of  commercial  and 
economic  education,  the  author  hopes  that  the  book  will  be 
serviceable  to  teachers  and  students  as  well  as  business 
men.  The  chapter  arrangement  is  :  Banking  in  General, 
Various  Kinds  of  Banking,  Capital  Stock,  Shareholders' 
Rights  and  Liabilities,  Undivided  Profits,  Dividends  and 
Surplus,  Deposits,  Checks,  Lawful  Money  Reserve,  Issuing 
Bank  Notes,  Borrowing  Money,  Loans  and  Discounts, 
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nessman cannot  fail  to  find  this  little  volume  of  decided 
value,  and  every  banker  would  do  well  to  place  it  in  the 
hands  of  his  clerks  and  depositors.    137  pages,  16  mo.,  $1.25. 

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